ars
2009 annual report Clean affordable sustainable |
About First Solar First Solar, Inc. (NASDAQ: FSLR) manufactures photovoltaic (PV) solar modules
with an advanced semiconductor technology, and designs and builds utility-scale PV solar systems.
Our module manufacturing costs are the lowest in the world due to proprietary technology,
high-volume continuous-flow manufacturing, and operational excellence. We measure our long-term
financial success by earning a return on net assets targeted to be 5% above our cost of capital. In
October of 2009, we were added to the S&P 500® Index. By enabling clean, renewable electricity at
competitive prices, First Solar provides an economically and environmentally viable alternative to
peaking fossil-fuel electricity generation. First Solar PV power plants operate with no water, air
emissions, or waste stream. First Solar has set the benchmark for environmentally responsible
product life cycle management by introducing the industrys first prefunded, comprehensive
collection and recycling program for solar modules. From raw material sourcing through end-of-life
collection and recycling, First Solar is focused on creating value-driven renewable energy
solutions that protect and enhance the environment. For more information about First Solar, please
visit www.firstsolar.com. First Solar is proud to have been added to the S&P 500® in 2009 as the
3 rst pure-play renewable energy company in the composite index All 3 nancial numbers in this
report are based on U.S. Generally Accepted Accoun3 ng Principles. This report contains
forward-looking statements within the meaning of the United States federal securi3 es laws. These
forward-looking statements do not cons3 tute guarantees of future performance. These
forward-looking statements are based on current informa3 on and expecta3 ons, are subject to
uncertain3 es and changes in circumstances, and involve a number of factors that could cause actual
results to di3 er materially from those an3 cipated by these forward-looking statements, including
risks described in the companys most recent annual report on Form 10-K, and other 3 lings with the
Securi3 es and Exchange Commission. First Solar assumes no obliga3 on to update any forward-looking
informa3 on contained in this report or with respect to the informa3 on described herein. First
Solar | Annual Report 2009 |
To Our Shareholders: When I started as CEO of First Solar in October 2009, I knew I would be
leading a strong company with a bright future. Under the leadership of former CEO and current
Executive Chairman, Mike Ahearn, with a dedicated team of over 4,700 associates, First Solar had
become a world leader in solar module manufacturing and u3 lity-scale systems. Yet as we celebrated
our 10-year anniversary in 2009, we also experienced a challenging business environment, dealing
with industry-wide module over-supply and pricing adjustments, a weak global economy, and a 3
nancial climate that a3 ected project 3 nancing. Despite these obstacles, we remained steadfast and
made progress in advancing our mission to create enduring value by enabling a world powered by
clean, a3 ordable solar electricity and delivering on the commitments made to our shareholders. In
2009, First Solar achieved its financial guidance, delivering solid results. Revenues increased 66%
Rob Gille3 e year over year to $2.1 billion, and earnings per share increased 78% to $7.53 per
fully diluted share. We Chief Execu3 ve O3cer produced over 1.1 gigawa3 s (GW)double our 2008
totaland our module cost per wa3 decreased by 19% to $0.84 in the fourth quarter of 2009. We
generated free cash 3 ow of $395 million, and grew our cash and marketable securi-3 es balance to
$1.1 billion. Our opera3 ng margin was 32.9% of net sales, contribu3 ng to a 25.5% return on net
assets, exceeding our goal of 20% and crea3 ng signi3 cant economic value. First Solar is
well-positioned to meet growing global demand. In North America, we built 50 megawa3 s (MW) of u3
lity-scale projects, and in 2009 and early 2010, we signed or acquired 1.7GW (AC) of new contracts.
In Europe, we added 361MW of module demand to our long-term agreements, which allow for a total of
approximately $3.8 billion in sales from 2010 to 2013. In Asia, we entered the Chinese market with
a memorandum of understanding to sell modules for a 2GW solar installa3 on in Ordos City. And the
opportunity is growing. Through 2012, we currently project global demand to grow at a compound
annual growth rate of 30-35%, increasing global demand to an expected 12-13GW. To sa3 sfy this
demand, we are construc3 ng eight new lines at our Kulim, Malaysia manufacturing facility, set to
ramp up produc3 on in the 3 rst half of 2011. As part of a 10-year module supply agreement with EDF
Energies Nouvelles, an a3liate of one of the largest u3 li3 es in Europe, we announced plans to
build a two-line facility in Blanquefort, France. In the 3 rst quarter of 2010, we ramped our
fourth line at our Perrysburg, Ohio facility. By 2012, First Solars total manufacturing capacity
is expected to increase to 34 lines, equaling 1.8GW per annum based on the fourth quarter 2009
annual line run rate of 53.4MW. We will continue to focus on our goal of achieving price parity
with conventional fossil-fuel based peak electricity generation. To do this, we target cost reduc3
ons in module manufacturing, balance of system, and project 3 nancing. By con3 nuing to improve
conversion e3ciency, line run rate, material cost, and by driving volume to further decrease
overhead costs, we expect to achieve a cost reduc3 on of over 30% in our PV module manufacturing,
with a target to bring module costs down to $0.52-$0.63 per wa3 by 2014. By improving conversion
e3ciency, leveraging volume procurement around standardized hardware pla3 orms, and accelerating
installa3 on 3 me, we are striving to cut balance of system costs that include installa3 on
hardware and labor and which account for more than half of all capital costsby about 33% to
$0.91-$0.98 per wa3 by 2014. In 2010, we will serve the European feed-in tariff (FiT) markets and
continue developing new global markets. We expect the Euro-pean market to grow signi3 cantly year
over year. Germany remains the largest market with good 3 rst-half demand and uncertainty by
mid-year due to an an3 cipated reduc3 on in the FiT. We expect robust growth in France and Italy
while demand in Spain gradually recovers. We are planning for strong growth in our North American
systems business as we con3 nue to execute against our large pipeline. This segment con3 nues to
bene3 t from state Renewable Por3 olio Standards, the U.S. federal s3 mulus package in the form of
the federal Investment Tax Credit cash grant, and Ontario, Canadas Renewable Standard Energy O3 er
Program (RESOP). All of these programs contribute to increasing u3 lity adop3 on of solar-generated
energy. Finally, China, India, and Australia are emerging as poten3 ally large markets for which we
are establishing approaches. Our strong balance sheet and cash flow, along with our project
finance capabilities, are enabling us to attract investors to many utility-scale projects
throughout North America. In 2009, we sold our 80MW Sarnia, Ontario project to Enbridge Inc. and
our 21MW Blythe, California project to NRG Energy. Our 30MW project near Cimarron, New Mexico was
recently sold to Southern Company. These sales demonstrate our ability to design and build u3 lity
scale PV solar projects that generate a3 rac3 ve rates of return. First Solar made signi3 cant
progress toward our long-term goals in 2009. In 2010, we will con3 nue to execute on our roadmaps,
driving 3 nancial returns for our shareholders and customers. I wish to extend my thanks and
apprecia3 on to all our First Solar associates. It is through their con3 nued dedica3 on and crea3
vity that we look forward to another year of expansion and pro3 table growth. Sincerely, Rob Gille3
e, Chief Execu3 ve O3cer Annual Report 2009 | First Solar |
Driving Down Costs, Enhancing Value As a world leader in solar, First Solar understands that the
most important goal for the Module Cost/Wa3 industry is to achieve price parity with conven3 onal
fossil-fuel based peak electricity $1.60 Cost/Wa3 genera3 on, making clean solar power a3 ordable
on a broad scale. We expect to reach $1.40 this goal within the next three to four years through
the e3 ec3 ve execu3 on of our tech- $1.20 nology and cost reduc3 on roadmaps while developing
markets that are either de3 ned by abundant solar resources and/or have exis3 ng high opera3 ng
energy costs, or eco- PV Module $1.00 nomics where solar can be a3 rac3 ve rela3 ve to fossil-fuel
generated electricity. We $0.80 remain focused on reducing PV system costs in three areas;
modules, balance of system 2005 2006 2007 2008 2009 (BoS) components, and project development and
3 nancing. Executing module cost reduction toward price parity requires a roadmap for driving our
manufacturing cost from $0.84 per wa3 in the fourth quarter of 2009, to a range of $0.52-$0.63 per
wa3 in 2014. One important lever for reducing module manufacturing cost per wa3 is increasing the
conversion e3ciency of the module itself. Today, our module conversion e3ciency averages 11.1%, and
we are improving this number by con-3 nually advancing our technology. We are also driving down
module produc3 on costs by improving the throughput of our factories, reducing material costs, and
op3 mizing plant scale. Using a proprietary replica3 on process called Copy Smart, First Solar is
able to build and expand new manufacturing facili3 es in cost-e3 ec3 ve loca3 ons, such as Kulim,
Kulim, Malaysia Manufacturing Malaysia, at a rapid pace while ensuring that each factory mirrors
the others in product Plant and Expansion Site e3ciency, reliability, and safety. This approach
has enabled First Solar to increase its global module produc3 on capacity from 25MW in 2005 to an
expected 1.8GW in 2012, allowing us to scale our costs as we grow. Installa3 on Velocity Reducing
balance of system component coststhe source of more than half of the By applying replica3 on
techniques to the process of installing solar mod-costs of a PV projectmeans that First Solar is
con3 nuously op3 mizing its installa3 on ules, we doubled the rate at which we process and reducing
the per-wa3 costs on items such as moun3 ng hardware, wiring, can construct PV power plants from
installa3 on labor, and inverters. Our goal is to lower BoS costs to $0.91-$0.98 per wa3 2008 to
2009, resul3 ng in lower BoS in 2014, a reduc3 on of about 33%. Our e3 orts to improve the
conversion e3ciency of costs per wa3 . our modules will also contribute to reducing the per-wa3
cost requirements for instal-la3 on labor and components. During 2009, we made signi3 cant progress
as we doubled Blythe, California, USA 21MW (AC) September 11th the rate at which we can construct
PV power plants compared to 2008. Increasing our installa3 on velocity also reduces working capital
requirements, ensuring a strong balance sheet. Lowering project development and finance costs is
enabled by this strong balance sheet. For a u3 lity-scale solar system, the creditworthiness of the
project developer, engineering, procurement, and construc3 on contractor, and module supplier is a
key October 23rd component in establishing the cost of debt. A lower 3 nancing cost directly
impacts the economic viability of projects and leads to a lower system cost, which in turn
contributes to achieving our grid parity goal. Our ability to build and sell our U.S. u3
lity-scale systems is bolstered by a feature of the 2009 American Recovery and Reinvestment Act
which allows the equity owner to receive an immediate cash payment in lieu of the 30% Investment
Tax Credit (ITC) that would otherwise be granted as a credit against future tax payments. We have
also applied to November 27th, 3 nished in about 13 weeks the Department of Energy
(DOE) under
its loan guarantee program to help reduce the 3 nancing costs of upcoming PV projects like our
550MW Desert Sunlight solar plant, located in Californias Chuckwalla Valley. This project is
expected to begin construc3 on in late 2010. We believe the ITC cash grant and DOE loan guarantee
program will be e3 ec3 ve in assis3 ng project 3 nancing in the near term, however their respec3 ve
2010 and 2011 expira3 ons limit the projects that can qualify. First Solar has recommended that
these programs be extended. First Solar | Annual Report 2009 |
Growing in European FiT Markets and
Expanding into Developing Markets We currently project global demand to grow at a compound annual
growth rate of 30-35% through 2012, increasing annual demand to 12-13GW worldwide. We Europe
expect installa3 ons in 2010 to reach 7.5-8.5GW. We will serve the European FiT markets and con3
nue developing new global markets like North America, China, India, and Australia. Europe The
European market remains promising for First Solar, driven over the next three to 3 ve years by the
European Unions 20% by 2020 renewables mandate. In 2009, the German market grew strongly to about
3GW and con3 nued to be the industrys In 2009, the 53MW (DC) Lieberose Solar largest as our partners built commercial roo3 op and ground-mount
systems. The Park was completed in Germany in col-German Lieberose Solar Park, a 53MW project
built on conversion land, is a model labora3 on with juwi Solar. Sited on a former military
training ground, the crea3 on of this for future solar development. The Italian market is expected
to be the second larg- project prompted the removal of tons of est in Europe in 2010, and several
of our partners are ac3 vely developing projects muni3 ons waste. there. A recent example is juwi
Solar with a 1MW roo3 op installa3 on on the Ben-tegodi stadium in Verona, Italy. France recently
enhanced their FiT, and its market is expected to be the third-largest in Europe in 2010. To
address this an3 cipated demand, we plan to build a two-line facility in Blanquefort, France, in
conjunc3 on with a ten-year module supply agreement with EDF Energies Nouvelles (EDF-EN). EDF-EN
currently is construc3 ng a 76MW Gabardan project in Losse, southwestern France using First Solar
modules. North America In Italy, juwi Solars 1MW (DC) roo3 op project on the Bentegodi Stadium in
Verona In North America, First Solars 2009 purchase of the Op3 solar project development is
genera3 ng about one million kilowa3 -pipeline has yielded the upcoming 550MW Desert Sunlight
project for both Paci3 c hours of emission-free electricity per year Gas & Electric (PG&E) and
Southern California Edison (SCE), the 550MW Topaz proj- using over 13,000 First Solar modules. ect
for PG&E, and the 300MW Stateline project for SCE. In total, we added 1.7GW of U.S. power purchase
agreements and Ontario RESOP agreements in North North America America in 2009 and in early 2010.
First Solar accounts for approximately 16% of the announced 8.6GW of U.S. u3 lity-scale solar PV
and concentrated solar projects. We expect to remain strong in these markets by con3 nuing to o3
er the fastest lead 3 me to genera3 on and to Renewable Por3 olio Standard compliance. In addi3 on,
we are currently expanding sites built for customers in 2009. For instance, the 10MW El Dorado site
in Boulder City, Nevada, built for Sempra, is being expanded by 48MW, and the 20MW Sarnia, Ontario
project is being increased by 60MW for Enbridge. The 3 rst 20MW (AC) of an 80MW (AC) proj-
Asia/Paci3 c ect in Sarnia, Ontario, Canada was built for In China, First Solar signed a
memorandum of understanding for a mul3 -phase, Ontario Power Authority and was sold to 2GW solar
power plant to be built near Ordos City in Inner Mongolia. In Australia, Enbridge Inc. we are
pursuing over 500MW of opportuni3 es on roo3 op, ground-mount, and o3 -grid applica3 ons. Asia
North American Projects ONTARIO Toronto Salt Lake City MICHIGAN Sarnia Walpole NEVADA Denver St.
Clair Belmont Sacramento UTAH COLORADO Detroit Tilbury Amherstburg San Francisco Toledo CALIFORNIA
Cleveland Fresno Cimarron 333333333 Las Vegas OHIO El Dorado Copper Site of the 2GW (AC) solar
power plant to be Topaz Mountain Stateline Albuquerque built in Ordos City, China. ARIZONA PNM
Sunlight Los Angeles Phoenix NEW MEXICO Blythe Annual Report 2009 | First Solar |
Delivering Solid Financials First Solar delivered strong 3 nancial results during 2009, Megawa3s
Produced despite a di3cult economic and market environment. We 1,200 grew sales and doubled our
market share, increasing our 1,113 earnings per share by 78% to $7.53 per fully diluted share,
1,000 while delivering a 25.5% return on net assets, exceeding our 800 cost of capital. Opera3 ng
and free cash 3 ows were $675 mil- MW 600 lion and $395 million, respec3 vely. In 2009, First Solar
was 504 added to the S&P 500® as the 3 rst pure-play renewable 400 energy company. 200 206 60
First Solars strong balance sheet and 3 nancial performance 0 give us a dis3 nct compe3 3 ve
advantage. Customers and 2006 2007 2008 2009 project investors view us as a stable partner that
can build, operate, and warranty mul3 -billion dollar projects over mul3 ple years. We meet or
exceed all quan3 ta3 ve criteria Net Sales for an investment-grade credit ra3 ng, enabling us to
a3 ract $2,500 low-cost 3 nancing for both capacity expansion and project development. $2,000
2,066 Millions $1,500 1,246 $1,000 $500 504 135 $0 2006 2007 2008 2009 Net & Opera3ng Income
Earnings per Diluted Share $800 $8 7.53 $700 680 $7 640 $6 $600 $500 $5 438 $400 Dollars $4 4.24
Millions $300 348 $3 $200 158 $2 Net Income 2.03 $100 137 Opera3ng Income $1 4 0.07 $0 3 $0 2006
2007 2008 2009 2006 2007 2008 2009 Opera3ng and Free Cash Flow Cash & Market Securi3es vs Debt
$800 $1,200 Opera3ng Cash Flow Total Cash 1,114 675 $1,000 Free Cash Flow Total Debt $600 $800 822
Millions $400 395 Millions $600 670 463 $400 $200 $200 308 206 $0 $0 -1 4 -$200 -81 -175 -36
-108 -154 -198 ( $200) -$400 2006 2007 2008 2009 2006 2007 2008 2009 |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 26, 2009
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
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20-4623678 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common stock, $0.001 par value
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The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
þ No
o
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
o No
þ
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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
The aggregate market value of the registrants common stock, $0.001 par value per share, held
by non-affiliates of the registrant on June 27, 2009, the last business day of the registrants
most recently completed second fiscal quarter, was approximately $7,360,781,207 (based on the
closing sales price of the registrants common stock on that date). Shares of the registrants
common stock held by each officer and director and each person who owns 5% or more of the
outstanding common stock of the registrant are not included in that amount, because such persons
may be deemed to be affiliates of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of February 12, 2010, 85,229,228
shares of the registrants common stock, $0.001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the extent
not set forth herein, is incorporated by reference from the registrants definitive proxy statement
relating to the Annual Meeting of Shareholders to be held in 2010, which will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal year to which this
Annual Report on Form 10-K relates.
FIRST SOLAR, INC. AND SUBSIDIARIES
Form 10-K for the Fiscal Year Ended December 26, 2009
Table of Contents
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PART I
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Business
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3 |
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Executive Officers of the Registrant
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Risk Factors
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Unresolved Staff Comments
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34 |
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Properties
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Legal Proceedings
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Submission of Matters to a Vote of Security Holders
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PART II
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases
of Equity Securities
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Selected Consolidated Financial Data
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39 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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40 |
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Quantitative and Qualitative Disclosures about Market Risk
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59 |
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Financial Statements and Supplementary Data
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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Controls and Procedures
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Other Information
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PART III
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Directors, Executive Officers and Corporate Governance
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Executive Compensation
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Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters
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Certain Relationships and Related Transactions, and Director Independence
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Principal Accountant Fees and Services
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PART IV
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Exhibits and Financial Statement Schedules
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Consolidated Financial Statements |
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Index to Exhibits |
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Throughout this Annual Report on Form 10-K, we refer to First Solar, Inc. and its
consolidated subsidiaries as First Solar, the Company, we, us, and our. Our fiscal
years end on the last Saturday in December. Our last three fiscal years ended on December 26,
2009, December 27, 2008 and December 29, 2007.
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual
Report on Form 10-K, 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 profit, 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, 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. Our forward-looking statements are only predictions based on our current
expectations and our projections about future events. All forward-looking statements included in
this Annual Report on Form 10-K are based upon information available to us as of the filing date
of this Annual Report on Form 10-K. 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 Item 1A: Risk Factors and
elsewhere in this Annual Report on Form 10-K. You should carefully consider the risks and
uncertainties described under this section.
PART I
Item 1: Business
Overview
We manufacture and sell solar modules with an advanced thin film semiconductor technology,
and we design, construct and sell photovoltaic (PV) solar power systems.
In addressing a growing global demand for PV solar electricity, we target markets with
varying approaches depending on the underlying economics, market requirements and distribution
channels. In subsidized feed-in tariff (FiT) markets, such as Germany, we have historically sold
most of our solar modules to solar project developers, system integrators and independent power
producers. In other markets, such as the United States, the demand for solar has been primarily
driven by renewable portfolio standards requiring regulated utilities to supply a portion of
their total electricity from renewable energy sources such as solar power. To meet the needs of
these markets and enable balance of system cost reductions, we have developed a fully integrated
systems business that can provide low-cost turn-key utility-scale PV system solutions for system
owners and low cost electricity to utility end-users. By building a fully integrated systems
business, we believe we are in a position to expand our business in transitional, and eventually
economically sustainable markets (in which subsidies or incentives are minimal), which are
expected to develop in areas with abundant solar resources and sizable electricity demand, such
as the United States, China, India and parts of Europe. In the long-term, we plan on competing
on an economic basis with conventional fossil fuel based peaking power generation.
In furtherance of our goal of delivering the lowest cost of solar energy and achieving
price parity with conventional fossil-fuel based peak electricity generation, we are continually
focused on reducing PV system costs in three primary areas: module manufacturing, Balance of
System (BoS) costs (consisting of costs of components of a solar power system other than the
solar modules, including inverters, mounting hardware, grid interconnection equipment, wiring
and other devices, and installation labor costs), and cost of capital. First, with respect to
our module manufacturing costs, our advanced technology has allowed us to reduce our average
module manufacturing costs to the lowest in the world, based on publicly available information.
In 2009, our total average manufacturing costs were $0.87 per watt, which we believe is
significantly less than those of traditional crystalline silicon solar
3
module manufacturers. By continuing to improve conversion efficiency and production line
throughput, lower material cost and drive volume scale to further decrease overhead costs, we
believe that we can further reduce our manufacturing costs per watt and maintain our cost
advantage over traditional crystalline silicon solar module manufacturers. Second, by continuing
to improve conversion efficiency, leverage volume procurement around standardized hardware
platforms, and accelerate installation time, we believe we can continue to make substantial
reductions in BoS costs, which represent over half of all costs associated with a typical
utility-scale PV solar power system. Finally, we believe that continuing to strengthen our
financial position, including our balance sheet and credit profile, will enable us to continue
to lower the cost of capital associated with our solar power systems, thereby further enhancing
the economic viability of our projects and lowering the cost of electricity generated by solar
power systems that incorporate our modules and technology.
We are the worlds largest PV solar module manufacturer and produced more than 1.1
gigawatts (GW) of solar modules in 2009, becoming the first PV company to attain this production
volume in a single year. We manufacture our solar modules on high-throughput production lines
and perform all manufacturing steps ourselves in an automated, proprietary, continuous process.
Our solar modules employ a thin layer of semiconductor material to convert sunlight into
electricity. Our manufacturing process eliminates the multiple supply chain operators and
expensive and time consuming batch processing steps that are used to produce a crystalline
silicon solar module. Currently, we manufacture our solar modules at our Perrysburg, Ohio,
Frankfurt/Oder, Germany and Kulim, Malaysia manufacturing facilities (with additional
manufacturing facilities planned for construction in Kulim, Malaysia and France) and conduct our
research and development activities primarily at our Perrysburg, Ohio manufacturing facility.
Our fully integrated solar power systems business includes (i) project development, (ii)
engineering, procurement and construction (EPC) services, (iii) operating and maintenance (O&M)
services, and (iv) project finance expertise, all as described in more detail below.
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Our project development group obtains land and land rights for the development of
solar power plants incorporating our modules, negotiates long-term power purchase
agreements (PPA) with potential purchasers of the electricity to be generated by those
plants, manages the interconnection and transmission process, negotiates agreements to
interconnect the plant to the electric grid and obtains the permits which are required
prior to the construction of the plant, including applicable environmental and land use
permits. Our project development portfolio and capabilities have grown significantly
primarily as a result of our acquisition of the project development business of
OptiSolar Inc. in April 2009, and our acquisition of certain assets from Edison Mission
Groups utility-scale solar project development pipeline in January 2010. We sell
developed projects or projects under development to system operators who wish to own
generating facilities, such as utilities, or to investors who are looking for long-term
investment vehicles that are expected to generate consistent returns. |
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We provide EPC services to projects developed by our project development business,
projects developed by independent solar power project developers, and directly to system
owners such as utilities. The procurement component of our EPC services includes
deployment of our modules as well as balance of system components that we procure from
third parties. |
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For solar power plants which we have developed and built, we may provide ongoing O&M
services to the system owner under long-term service agreements. These O&M services may
include overseeing the day-to-day operation of the system, safety and security,
maximizing energy production, and management of reliability, site services, power
purchase agreement and other contractual compliance, environmental and permit
compliance, regulatory requirements, recordkeeping, forecasting, warranty, preventative
and scheduled maintenance, and spare parts inventory and may also include certain
additional guarantees relating to the project. |
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Our project finance group is primarily responsible for negotiating and executing the
sale of utility-scale power plant systems incorporating our modules which allows us to
optimize the value of our project development portfolio. This group is experienced in
structuring non-recourse project debt financing in the bank loan market and
institutional debt capital markets and raising project equity capital from tax oriented
and strategic industry equity investors. |
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We believe that combining our reliable, low cost module manufacturing capability with our
systems business enables us to more rapidly reduce the price of solar electricity, to accelerate
the adoption of our technology in large scale systems and to further our mission to create
enduring value by enabling a world powered by clean, affordable solar electricity.
Segment Information
We operate our business in two segments. Our components segment designs, manufactures and
sells solar modules to solar project developers and system integrators. Through our systems
segment, we have the capability to provide a complete PV solar power system for utility-scale or
large commercial systems, which includes project development, EPC, O&M services and, when
required, project finance. We view the sale of solar modules from the components segment as the
core driver of our profitability, return on net assets and cash throughput, and we view our
systems segment as an enabler to drive module throughput.
As of December 26, 2009, our systems segment had not met the quantitative criteria for
disclosure as a separate reporting segment. See also Note 22. Segment and Geographic
Information to our consolidated financial statements included in this Annual Report on Form
10-K.
Components Business
Our components segment, which is our principal business, involves the design, manufacture
and sale of solar modules which convert sunlight to electricity.
Solar Modules
Each solar module is approximately 2ft X 4ft (60cm X 120cm) and had an average rated power
of approximately 75 watts, 73 watts, and 70 watts for 2009, 2008 and 2007, respectively. Our
solar module is a single-junction polycrystalline thin film structure that uses cadmium
telluride as the absorption layer and cadmium sulfide as the window layer. Cadmium telluride has
absorption properties that are highly matched to the solar spectrum and has the potential to
deliver competitive conversion efficiencies using only about 1% of the semiconductor material
used by traditional crystalline silicon solar modules. Our thin film technology also has
relatively high energy performance in low light and high temperature environments compared with
traditional crystalline silicon solar modules.
Manufacturing Process
We have integrated our manufacturing processes into a continuous, integrated production
line with the following three stages: the deposition stage, the cell definition stage, and
the assembly and test stage. In the deposition stage, panels of treated glass are robotically
loaded onto the production line where they are cleaned, heated and coated with a layer of
cadmium sulfide followed by a layer of cadmium telluride using our proprietary vapor transport
deposition technology, after which the semiconductor-coated plates are cooled rapidly to
increase strength. In our cell definition stage, we use high speed lasers to transform the large
single semiconductor-coated plate into a series of interconnected cells that deliver the desired
current and voltage output. Our proprietary laser scribing technology is capable of
accomplishing accurate and complex scribes at high speeds. Finally, in the assembly and test
stage, we apply busbars, laminate, a rear glass cover sheet and termination wires, seal the
joint box and subject each solar module to a solar simulator and current leakage test. The final
assembly stage is the only stage in our production line that requires manual processing.
Our manufacturing facilities in Perrysburg, Ohio, Frankfurt/Oder, Germany and Kulim,
Malaysia have each received both an ISO 9001:2000 quality system certification and ISO
14001:2004 environmental system certification. We anticipate that our additional manufacturing
facilities, planned for construction in France and Kulim, Malaysia, will also obtain these
certifications in 2011. During 2009, our Perrysburg facility also received the Occupational
Health and Safety Standards (OHSAS) 18001 certification, an international occupational health
and safety management system specification.
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Research, Development and Engineering
We continue to devote a substantial amount of resources to research and development with
the primary objective of lowering the per watt cost of electricity generated by photovoltaic
systems using our solar modules. Within our components business, we focus our research and
development activities on, among other areas, continuing to increase the conversion efficiency
of our solar modules and improving manufacturing efficiencies (including volume ramp, throughput
improvement and material cost reduction). We believe the most promising ways of increasing the
conversion efficiency of our solar modules include maximizing the number of photons that reach
the absorption layer of the semiconductor material to facilitate conversion into electrons,
thereby maximizing the number of electrons that reach the surface of the semiconductor and
minimizing the electrical losses between the semiconductor layer and the back metal conductor.
In the course of our research and development activities, we continuously explore and
research new technologies in our efforts to sustain competitive differentiation in our modules.
We typically qualify process and product improvements for full production at our Ohio plant and
then use our Copy Smart process to propagate them to our other production lines. We believe
that this systematic approach to research and development will provide continuous improvements
and ensure uniform adoption across our production lines. In addition, our production lines are
replicas of each other using our Copy Smart process, and as a result, a process or production
improvement on one line can be rapidly deployed to other production lines.
Customers
With respect to our components business, during 2009, we sold most of our solar modules to
solar project developers and system integrators headquartered in Germany, France, Spain and
Italy. Our customers typically develop, construct, own and operate solar power plants or sell
turnkey solar power plants to end-users that include owners of land, owners of agricultural
buildings, owners of commercial warehouses, offices and industrial buildings, public agencies,
municipal government authorities, utility companies and financial investors that desire to own
large scale solar power plant projects.
As of December 26, 2009, we had long-term supply contracts for the sale of solar modules
with fourteen principal customers (Long-Term Supply Contracts) headquartered throughout the
European Union. We also have a five-year agreement with a solar power system project developer
and system integrator in the United States, which is a related party. Together, these contracts
account for a significant portion of our planned module production over the period from 2010
through 2013 and therefore will significantly affect our overall financial performance. We have
in the past amended pricing and other terms in our Long-Term Supply Contracts in order to remain
competitive, as described below, and we may decide in the future to further amend such contracts
in order to address the highly competitive environment. In addition, we enter into module sale
agreements or standard purchase orders with customers for specific projects.
During the first quarter of 2009, we amended our Long-Term Supply Contracts with certain
customers to further reduce the sales price per watt under these contracts in 2009 and 2010 in
exchange for increases in the volume of solar modules to be delivered under the contracts. We
also extended the payment terms for certain customers under these contracts from net 10 days to
net 45 days to increase liquidity in our sales channel and to reflect longer module shipment
times from our manufacturing plants in Malaysia. During the third quarter of 2009, we amended
our Long-Term Supply Contracts with certain of our customers to implement a program which
extends a price rebate to certain of these customers for solar modules purchased from us and
installed in Germany. The intent of this program is to enable our customers to successfully
compete in our core segments in Germany. The rebate program applies a specified rebate rate to
solar modules sold for solar power projects in Germany at the beginning of each quarter for the
upcoming quarter. The rebate program is subject to periodic review and we adjust the rebate rate
quarterly upward or downward as appropriate. The rebate period commenced during the third
quarter of 2009 and terminates at the end of the fourth quarter of 2010. Customers need to meet
certain requirements in order to be eligible for and benefit from this program.
During 2009, principal customers of our components business were Blitzstrom GmbH, EDF EN
Development, Gehrlicher Solar AG, Juwi Solar GmbH, and Phoenix Solar AG. During 2009, each of
these five customers individually accounted for between 10% and 19% of our component segments
net sales. All of our other customers
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individually accounted for less than 10% of our net sales during 2009. The loss of any of our
major customers could have an adverse effect on our business. As we expand our manufacturing
capacity, we are seeking to develop additional customer relationships in other markets and
regions, which would reduce our customer and geographic concentration and dependence.
While our Long-Term Supply Contracts have certain firm purchase commitments, these
contracts are subject to amendments made by us or requested by our customers, such as the above
mentioned amendments entered into during 2009. These amendments decreased the expected revenue
under our Long-Term Supply Contracts during 2009. In addition, our Long-Term Supply Contracts
are substantially denominated in euros and therefore are subject to exchange rate fluctuations
between the euro and U.S. dollar. The strengthening of the euro compared to the U.S. dollar
during 2009 partially offset the decrease in the expected revenue under our Long-Term Contracts
resulting from the 2009 amendments.
As of December 26, 2009, the Long-Term Supply Contracts in the aggregate allowed for
approximately $3.8 billion (3.3 billion denominated in euro at an assumed exchange rate of
$1.15/A1.00 and 0.2 billion denominated in USD) in sales from 2010 to 2013. As of December 27,
2008, the Long-Term Supply Contracts in the aggregate allowed for approximately $5.8 billion
(4.9 billion denominated in euro at an assumed exchange rate of $1.15/A1.00 and 0.2 billion
denominated in USD) in sales from 2009 to 2013. The above-referenced dollar amounts relating to
the Long-Term Supply Contracts declined from 2008 to 2009, primarily due to revenue recognized
for contracted volumes sold in 2009, module pricing adjustments, the impact of the rebate
program implemented in 2009 as described above, and pre-set price reductions under the terms of
the Long-Term Supply Contracts.
We anticipate that approximately 55% of the aggregate contracted revenue under the
Long-Term Supply Contracts as of December 26, 2009, will not be fulfilled in 2010 because they
are associated with deliveries to be made in 2011 and later periods. We believe that the
aggregate dollar amount associated with the Long-Term Supply Contracts at any particular date is
not necessarily a meaningful indicator of future revenue for any particular period because the
fulfillment of such amount is subject to a variety of factors, including the factors described
above.
Competition
The renewable energy, solar energy and solar module sectors are highly competitive and
continually evolving as participants strive to distinguish themselves within their markets and
compete within the larger electric power industry. We expect to face continued competition,
which may result in price reductions, reduced margins or loss of market share. With respect to
our components business, we believe that our main sources of competition are crystalline silicon
solar module manufacturers, silicon and non-silicon based thin film module manufacturers and
companies developing solar thermal and concentrated photovoltaic technologies. Among
photovoltaic module and cell manufacturers, the principal methods of competition are price per
watt, production capacity, conversion efficiency, reliability, warranty terms and finance
ability. At December 26, 2009, the global photovoltaic industry consisted of more than 150
manufacturers of solar cells and modules.
In addition, we expect to compete with future entrants to the photovoltaic industry that
offer new technological solutions. We may also face competition from semiconductor manufacturers
and semiconductor equipment manufacturers or their customers, several of which have already
announced their intention to start production of photovoltaic cells, solar modules or turnkey
production lines. Some of these competitors may be part of larger corporations and have greater
financial resources and greater brand name recognition than we do and may, as a result, be
better positioned to adapt to changes in the industry or the economy as a whole.
We also face competition from companies that currently offer or are developing other
renewable energy technologies (including wind, hydropower, geothermal, biomass and tidal
technologies) and other power generation sources that burn conventional fossil fuels.
Raw Materials
Our manufacturing process uses approximately 20 types of raw materials and components to
construct a complete solar module. One critical raw material in our production process is
cadmium telluride. Of the other raw
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materials and components, the following eight are also critical to our manufacturing process:
front glass coated with thermal conductive oxide, cadmium sulfide, photo resist, laminate,
tempered back glass, cord plate/cord plate cap, lead wire and solar connectors. Before we use
these materials and components in our manufacturing process, a supplier must undergo a
qualification process that can last up to 12 months, depending on the type of raw material or
component. Although we continually evaluate new suppliers and currently are qualifying several
new suppliers, a few of our critical materials or components are sole sourced and most others
are supplied by a limited number of suppliers.
Collection and Recycling Program
Consistent with the environmental philosophy of extended producer responsibility, we have
established the solar industrys first comprehensive, prefunded module collection and recycling
program. The program is designed to maximize the recovery of valuable materials for use in new
modules or other new products and minimize the environmental impacts associated with our modules
at the end of their useful life. Approximately 90% of each collected First Solar module is
recycled into new products, including new modules. End-users can request collection and
recycling of their solar modules by us at any time at no cost. We pre-fund the estimated
collection and recycling cost at the time of sale, assuming for this purpose a minimum service
life of approximately 25 years for our solar modules. In addition to achieving substantial
environmental benefits, our solar module collection and recycling program may provide us the
opportunity to resell or redistribute working modules or recover certain raw materials and
components for reuse in our manufacturing process. We currently have recycling facilities
operating at each manufacturing facility (for manufacturing scrap, warranty returns and modules
collected at the end of their useful life) that produce glass suitable for use in the production
of new glass products and extract metals that will be further processed by a third party
supplier to produce semiconductor materials for reuse in our solar modules.
To ensure that the pre-funded amounts are available regardless of our financial status in
the future, a trust structure has been established; funds are put into custodial accounts in the
name of a trustee. Only the trustee can distribute funds from the custodial accounts and these
funds cannot be accessed for any purpose other than for administering module collection and
recycling, either by us or a third party executing the collection and recycling services. To
provide further assurance that sufficient funds will be available, our module collection and
recycling program, including the financing arrangement, is audited periodically by an
independent third-party auditor.
Solar Module Warranty
We provide a limited warranty against defects in materials and workmanship under normal use
and service conditions for five years following delivery to the owners of our solar modules. We
also warrant to the owners of our solar modules that solar modules installed in accordance with
agreed-upon specifications will produce at least 90% of their power output rating during the
first 10 years following their installation and at least 80% of their power output rating during
the following 15 years. In resolving claims under both the defects and power output warranties,
we have the option of either repairing or replacing the covered solar module or, under the power
output warranty, providing additional solar modules to remedy the power shortfall. Our
warranties are automatically transferred from the original purchasers of our solar modules to
subsequent purchasers. As of December 26, 2009, our accrued warranty liability was $22.6
million, of which $8.2 million was classified as current and $14.4 million was classified as
noncurrent.
Systems Business
Through our fully integrated systems business, we provide a complete PV solar power system
solution, which includes project development, EPC services, O&M services and, when required,
project finance.
Our systems business has grown over the past several years through a combination of
business acquisitions and organic growth. On November 30, 2007, we completed the acquisition of
Turner Renewable Energy, LLC, a privately held company which provided EPC services for
commercial solar power projects in the United States. On April 3, 2009, we completed the
acquisition of the project development business of OptiSolar Inc., which included a
multi-gigawatt project pipeline. In January 2010, we completed the acquisition of certain assets
from Edison Mission Groups solar project development pipeline consisting of utility-scale solar
projects located primarily on private land in California and the Southwest.
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Project Development
Our systems business is dependent upon successful completion of project development
activities including: site selection and acquisition, obtaining in a timely manner the requisite
interconnection and transmission studies, environmental and land use permits, maintaining
effective site control, and entering into a power purchase agreement with an off-taker of the
power to be generated by the project. These activities culminate in receiving the right to
construct and operate a solar power system. Power purchase agreements define the price and terms
the utility customer will pay for power produced from a project. Entering into a power purchase
agreement generally provides the underlying economics needed to advance the construction,
finance and eventual sale of the project to the long-term site owner and power producer subject
to obtaining all necessary permits. Depending primarily on the location and other site
attributes, the development cycle can range from one to five years or longer in some
circumstances. We may be required to spend significant sums for preliminary engineering,
permitting, legal and other expenses before we can determine whether a project is feasible,
economically attractive, or capable of being built. If there is a delay in obtaining any
required regulatory approvals, we may be forced to incur additional costs and/or the right of
the off-taker under the power purchase agreement to terminate may be triggered.
Our project development activities are currently focused on markets in North America, Europe and
Asia.
In North America, we have entered into approximately 1.25GW of power purchase agreements
with utilities in the southwestern U.S. and have a pipeline of approximately 150 megawatts (MW)
of projects in Canada governed under Ontarios Renewable Energy Standard Offer Program (RESOP),
for a total pipeline of 1.4GW of projects in North America that we expect to develop between
2010 and 2014.
In Europe, we are engaged in project development activities with respect to certain
projects in France and Italy that we acquired as part of the OptiSolar pipeline, and we are
actively evaluating additional project opportunities in Europe.
In Asia, our project development activities include our initiatives in China. In September
2009, we entered into a Memorandum of Understanding with the Ordos, China City Government
outlining a long-term strategic relationship between the parties pursuant to which we would,
through an appropriate business model, develop and construct a 2000MW photovoltaic power plant
located within the Ordos New Energy Industry Demonstration Zone in China. In November 2009, we
entered into a Cooperation Framework Agreement with the Ordos government outlining additional
project details, timing and local support for the 2000MW power plant. The Memorandum of
Understanding and the Corporation Framework Agreements set forth the agreement in principle of
the parties concerning the project and related activities, and final agreement between the
parties is subject to the negotiation and execution of definitive agreements among the parties.
In the fourth quarter of 2009, we sold our 20MW solar project in Sarnia, Ontario, Canada to
Enbridge Inc. The power output of the Sarnia facility will be sold to the Ontario Power
Authority pursuant to a 20-year power purchase agreement under the terms of the Ontario RESOP
program. Later in the fourth quarter of 2009, we entered into an agreement with Enbridge Inc. to
expand the Sarnia facility from 20MW to 80MW. When completed later in 2010, the Sarnia facility
is expected to be the largest PV solar facility in North America. In the fourth quarter of 2009,
we also sold our 21MW solar project in Blythe, California to NRG Energy, Inc. Electricity
generated by the Blythe facility, which is currently Californias largest PV solar generation
facility, is being sold to Southern California Edison under a 20-year power purchase agreement.
Customers
With respect to our systems business, our customers consist of investor owned utilities,
independent power developers and producers, commercial and industrial companies, and other
system owners who purchase completed solar power plants, EPC services and/or operation and
maintenance services from us.
Competition
With respect to our systems business, we face competition from other providers of renewable
energy solutions, including developers of photovoltaic, solar thermal and concentrated solar
power systems and developers of other forms of renewable energy projects, including wind,
hydropower, geothermal, biomass and tidal projects. To the
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extent other solar module manufacturers become more vertically integrated, we expect to face
increased competition from such companies as well. We also face competition from other EPC
companies and joint ventures between EPC companies and solar companies.
Sales and Marketing
Historically, the majority of our module sales have been for grid-connected ground or
commercial roof mounted solar power systems in Germany and other European Union countries with
feed-in tariff subsidies. These feed-in tariff subsidies have been critical for the development
of the solar industry because they provided the demand visibility required for module
manufacturers and other participants in the solar value chain to reduce costs and drive scale.
In 2007, we began to identify and target certain key transition markets, such as the United
States, that had the potential to bridge the gap from the existing feed-in tariff markets to
sustainable markets. Within these transition markets, our strategy is to advocate for market
structures and policies that drive demand for solar power systems and to identify and break
constraints to the successful migration to sustainable solar markets. In furtherance of this
objective, we have developed a fully integrated systems business to increase module throughput,
drive cost reduction across the value chain, identify and break constraints to sustainable
markets and to deliver the most compelling solutions to our customers and end- users.
Economic Incentives
Government subsidies, economic incentives and other support for solar electricity
generation generally include feed-in tariffs, net metering programs, renewable portfolio
standards, tax incentives, loan guarantees, grants, rebates, low interest loans and grid access
initiatives.
Under a feed-in tariff subsidy, the government sets prices that regulated utilities are
required to pay for renewable electricity generated by end-users. The prices are set above
market rates and may differ based on system size or application. Net metering programs enable
end-users to sell excess solar electricity to their local utility in exchange for a credit
against their utility bills. The policies governing net metering vary by state and utility. Some
utilities pay the end-user upfront, while others credit the end-users bill.
Under a renewable portfolio standard (RPS), the government requires regulated utilities to
supply a portion of their total electricity in the form of renewable electricity. Some programs
further specify that a portion of the renewable energy quota must be from solar electricity,
while others provide no specific technology requirement for renewable electricity generation.
RPS-type mechanisms have been adopted in a majority of U.S. states. Regulations vary from state
to state, and currently there is no federal RPS mandate. The state of Californias RPS goal of
33% of electricity from renewable sources by 2020 is currently the most significant RPS program
in the United States in magnitude, and it is contributing to the expansion of the utility-scale
solar systems market in that state.
Tax incentive programs exist in the United States at both the federal and state level and
can take the form of investment and production tax credits, accelerated depreciation and sales
and property tax exemptions. At the federal level, investment tax credits for business and
residential solar systems have gone through several cycles of enactment and expiration since the
1980s. In October 2008, the United States Congress extended the 30% federal investment tax
credit (ITC) for both residential and commercial solar installations for eight years, through
December 31, 2016. The ITC is a primary economic driver of solar installations in the United
States. Its extension through 2016 has contributed to greater medium term demand visibility in
the U.S.; however, its expiration at the end of 2016 (unless extended) underscores the need for
the levelized cost of electricity from solar systems to continue to decline toward grid parity.
In February 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law.
In addition to adopting certain fiscal stimulus measures that could benefit on-grid solar
electricity applications, ARRA created a new program, through the Department of the Treasury,
which provides cash grants equal to 30% of the cost of the system for solar installations that
are placed into service during 2009 and 2010 and for certain solar installations for which
construction begins prior to December 31, 2010. This cash grant is available in lieu of
receiving the 30% federal investment tax credit. The intent of this program was to ensure that
investors who had historically supported the renewable energy programs would not be constrained
from investing in these transactions by tax losses they may have suffered during the recent
credit crisis. Other measures adopted by ARRA that could benefit on-grid solar electricity
generation include the following: (1) a Department of
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Energy loan guarantee program for renewable energy projects, renewable energy manufacturing
facilities and electric power transmission projects and (2) a 50% bonus depreciation for solar
installations placed in service during 2009. Various legislation has been proposed to extend and
slightly modify the ITC incentives to continue to ensure short-term investor tax positions do
not limit future investment in renewable energy projects. In addition, legislation is being
proposed which could extend the bonus depreciation benefit for projects completed in 2010.
However, enactment of the extension or enhancement of such incentives is highly uncertain.
Rebate programs for solar installations in California and several other states have
increased the quantity of solar energy from distributed photovoltaic systems (typically smaller
non-utility scale PV systems co-located with residential or commercial rooftop end-users) and
have contributed to demand for PV solar modules and systems.
Regulations and policies relating to electricity pricing and interconnection also stimulate
demand for distributed generation from photovoltaic systems. PV systems generate most of their
electricity during mid-day and the early afternoon hours when the demand for and cost of
electricity is highest. As a result, electricity generated by PV systems mainly competes with
expensive peak hour electricity, rather than the lower average price of electricity.
Modifications to the peak hour pricing policies of utilities, such as to a flat rate, would
require PV systems to achieve lower prices in order to compete with the price of electricity.
In Europe, renewable energy targets in conjunction with feed-in tariffs have contributed to
the growth in PV solar markets. Renewable energy targets prescribe how much energy consumption
must come from renewable sources, while FiT policies are intended to support new supply
development by providing investor certainty. A 2001 European Union (EU) directive for promoting
renewable energy use in electricity generation (Directive 2001/77/EC) had set varying national
indicative targets for renewable energy production from individual member states. A 2009 EU
directive on renewable energy (Directive 2009/28/EC), which replaces the 2001 directive, sets
varying targets for all EU member states in support of the directives goal of a 20% share of
energy from renewable sources in the EU by 2020 and requires national action plans that
establish pathways for the development of renewable energy sources. The following is a
description of FiT policies adopted in certain critical EU markets in support of renewable
energy targets.
Currently, Germany, which accounted for approximately 65% of our 2009 net sales, is the
most significant market for our modules, and the recent proposed changes to German feed-in
tariffs are likely to affect our results of operations. The German Renewable Energy Law, or the
EEG, was last modified by the German government in 2008 with effect on January 1, 2009. At that
time, feed-in tariffs were significantly reduced from earlier levels. Further, under the current
legislation, Germany feed-in tariffs declined 9% for roof mounted applications and 11% for
ground mounted applications on January 1, 2010 and will decline on January 1, 2011 a further 8%
to 10% (based on the volume of PV modules deployed in Germany during the 12 months ending on
September 30, 2010 and the type of PV system). This compares to an annual decline of between 5%
and 6.5% under the prior legislation. The next review of feed-in tariffs for all types of
renewable energy was scheduled for 2012. However, following the 2009 election of a new
center-right-liberal government in Germany, a further reduction in the PV feed-in tariff is
currently under discussion and will most likely come into effect in the second or third quarter
of 2010. Such a reduction in the feed-in tariff, including any potential further reductions,
could result in a significant decline in demand and price levels for photovoltaic products in
Germany, which could have a material adverse effect on our business, financial condition or
results of operations.
In France, which accounted for approximately 12% of our 2009 net sales and where we have
announced plans to build a two-line manufacturing plant, the government amended its feed-in
tariff on January 12, 2010. The new decree became effective January 14, 2010 and does not have
an expiry date but can be amended at any time. The new feed-in tariff provides a lower rate than
the prior feed-in tariff for all applications while introducing, among other things, a
departmental bonus which makes free field projects in the northern regions of France more
attractive. In addition, the inflation index that increases the feed-in tariff received by a PV
project after its first year of operation was also reduced. The current feed-in tariff will have
a 10% annual digression starting on January 1, 2012.
In Italy, which accounted for approximately 6% of our 2009 net sales, the current
legislation provides that the existing feed-in tariff will be in effect until the expiration of
a 14 month transition period that will begin once 1.2GW of photovoltaic systems are installed
under the existing feed-in tariff. Any photovoltaic system that is interconnected before the
expiration of the transition period will also receive the feed-in tariff currently in effect. It
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is expected that the 1.2GW threshold will be reached in 2010. It is further expected that
the Italian government will propose and enact a new reduced feed-in tariff before the end of
2010.
In Spain, which accounted for approximately 3% of our 2009 net sales, the government
published the feed-in tariff currently in effect for PV systems in September 2008. This feed-in
tariff introduced a mechanism that requires a PV system to be registered in a national registry
in order to obtain the Spanish feed-in tariff. Critically, under the legislation, only a certain
number of MWs of PV systems so registered are granted a feed-in tariff each quarter. Other PV
systems applying for a feed-in tariff remain in a queue and will be awarded a feed-in tariff in
accordance with their place in the queue. For 2010 and 2011, the legislation limits the number
of MW of PV systems that are awarded a feed-in tariff to 560MWand 500MW, respectively. The
current legislation is scheduled to be reviewed by January 1, 2012.
In Ontario, Canada, a new feed-in tariff program was introduced in September 2009 and
replaced the Renewable Energy Standard Offer Program (RESOP) as the primary subsidy program for
future renewable energy projects. In order to participate in the Ontario feed-in tariff program,
certain provisions relating to minimum required domestic content and land use restrictions for
solar installations must be satisfied. The new domestic content and land restriction rules do
not apply to our Sarnia solar projects and the other projects governed by RESOP contracts that
we acquired in connection with our acquisition of the solar power project development business
of OptiSolar Inc. in April 2009. However, PV solar power systems incorporating our modules would
not satisfy the domestic content requirement under the new feed-in tariff program currently in
effect.
In Australia, which accounted for approximately 1% of our 2009 net sales, the solar
industry is driven by several regulatory initiatives that support the installation of solar PV
modules in both rooftop and free-field applications, including the nationwide Renewable Energy
Target Scheme that has set a renewable energy goal for Australia of 20% by 2020. In July 2009,
the Solar Homes and Communities Plan, which previously provided the primary incentive for
rooftop installations, was replaced with the less lucrative Solar Credits Scheme.
In China, governmental authorities have not adopted a feed-in tariff policy and currently
award solar projects through either a project tendering process or bi-lateral negotiations. We
did not have sales in China in 2009; however, in September 2009, we entered into a Memorandum of
Understanding with the Ordos, China City Government relating to the construction of a 2GW PV
power plant located within the Ordos New Energy Industry Demonstration Zone in China. See Item
1: Business Segment Information Systems Business Project Development.
In 2009, India announced its National Solar Mission, which includes a goal of installing
20GW of solar by 2022. India is expected to announce a feed-in tariff for the first phase of the
National Solar Mission in 2010. We did not have any sales in India in 2009.
For more information about risks related to economic incentives, please see Item 1A: Risk
Factors Reduced growth in or the reduction, elimination or expiration of government subsidies,
economic incentives and other support for on-grid solar electricity applications, including the
anticipated feed-in tariff reductions in Germany and certain other core markets, could reduce
demand and/or price levels for our solar modules, limit our growth or lead to a reduction in our
net sales, and adversely impact our operating results.
Intellectual Property
Our success depends, in part, on our ability to maintain and protect our proprietary
technology and to conduct our business without infringing on the proprietary rights of others.
We rely primarily on a combination of patents, trademarks and trade secrets, as well as
associate and third party confidentiality agreements, to safeguard our intellectual property. As
of December 26, 2009, we held 22 patents in the United States, which will expire at various
times between 2012 and 2026, and had 96 patent applications pending. We also held 28 patents and
had over 100 patent applications pending in foreign jurisdictions. Our patent applications and
any future patent applications might not result in a patent being issued with the scope of the
claims we seek, or at all, and any patents we may receive may be challenged, invalidated or
declared unenforceable. We continually assess appropriate occasions for seeking patent
protection for those aspects of our technology, designs and methodologies and processes that we
believe provide significant competitive advantages.
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As of December 26, 2009, we used two trademarks, First Solar and First Solar and
Design, in the United States and other countries.
With respect to proprietary know-how that is not patentable and processes for which patents
are difficult to enforce, we rely on, among other things, trade secret protection and
confidentiality agreements to safeguard our interests. We believe that many elements of our
photovoltaic manufacturing process, including our unique materials sourcing, involve proprietary
know-how, technology or data that are not covered by patents or patent applications, including
technical processes, equipment designs, algorithms and procedures. We have taken security
measures to protect these elements. All of our research and development personnel have entered
into confidentiality and proprietary information agreements with us. These agreements address
intellectual property protection issues and require our associates to assign to us all of the
inventions, designs and technologies they develop during the course of employment with us. We
also require our customers and business partners to enter into confidentiality agreements before
we disclose any sensitive aspects of our modules, technology or business plans.
We have not been subject to any material intellectual property claims.
Environmental Matters
Our manufacturing operations include the use, handling, storage, transportation, generation
and disposal of hazardous materials. We are subject to various federal, state, local and
international laws and regulations relating to the protection of the environment, including
those governing the discharge of pollutants into the air and water, the use, management and
disposal of hazardous materials and wastes, occupational health and safety, and the cleanup of
contaminated sites. Therefore, we could incur substantial costs, including cleanup costs, fines
and civil or criminal sanctions and costs arising from third party property damage or personal
injury claims, as a result of violations of or liabilities under environmental laws or
non-compliance with environmental permits required at our facilities. We believe we are
currently in substantial compliance with applicable environmental requirements and do not expect
to incur material capital expenditures for environmental controls in the foreseeable future.
However, future developments such as more aggressive enforcement policies, the implementation of
new, more stringent laws and regulations or the discovery of unknown environmental conditions
may require expenditures that could have a material adverse effect on our business, results of
operations and/or financial condition. See Item 1A: Risk Factors Environmental obligations
and liabilities could have a substantial negative impact on our financial condition, cash flows
and profitability.
Corporate History
In February 2006 we were incorporated as a Delaware corporation. Our common stock has been
listed on The NASDAQ Global Select Market under the symbol FSLR since our initial public
offering in November 2006. In October 2009, our common stock was added to the S&P 500 Index,
making First Solar the first, and currently only, pure-play renewable energy company in the
index.
Associates
As of February 12, 2010, we had approximately 4,700 associates (our term for full and
part-time employees), including approximately 3,900 in manufacturing. The remainder of our
associates are in research and development, sales and marketing and general and administrative
positions, including associates who are engaged in or support our systems business. None of our
associates are currently represented by labor unions or covered by a collective bargaining
agreement. As we expand domestically and internationally, however, we may encounter associates
who desire union representation or a collective bargaining agreement. We believe that our
relations with our associates are good.
Information About Geographic Areas
We have significant marketing, distribution and manufacturing operations both within and
outside the United States. Currently, we manufacture our solar modules at our Perrysburg, Ohio,
Frankfurt/Oder, Germany and Kulim, Malaysia manufacturing facilities (with additional
manufacturing facilities planned for construction in Kulim, Malaysia and France beginning in
2010). In 2009, 86% of our net sales were generated from customers
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headquartered in the European Union. We are in the process of expanding our operations,
particularly with respect to our systems business, to numerous countries worldwide, including
other European and Asian countries and Australia. As a result, we will be subject to the legal,
tax, political, social and regulatory requirements and economic conditions of many
jurisdictions. The international nature of our operations subject us to a number of risks,
including fluctuations in exchange rates, adverse changes in foreign laws or regulatory
requirements, and tariffs, taxes and other trade restrictions. See Item 1A: Risk Factors Our
substantial international operations subject us to a number of risks, including unfavorable
political, regulatory, labor and tax conditions in foreign countries. See also Note 22.
Segment and Geographical Information to our consolidated financial statements included in this
Annual Report on Form 10-K for information about our net sales and long-lived assets by
geographic region for the years ended December 26, 2009, December 27, 2008 and December 29,
2007. See also Item 7: Managements Discussion and Analysis of Financial Condition and Results
of Operations for other information about our operations and activities in various geographic
regions.
Available Information
We maintain a website at http://www.firstsolar.com. We make available free of charge on our
website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements and any amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically
file these materials with, or furnish them to, the SEC. The information contained in or
connected to our website is not incorporated by reference into this report. We use our website
as one means of disclosing material non-public information and for complying with our disclosure
obligations under the SECs Regulation FD. Such disclosures will typically be included within
the Investor Relations section of our website (http://investor.firstsolar.com). Accordingly,
investors should monitor such portions of our website, in addition to following our press
releases, SEC filings and public conference calls and webcasts.
The public may also read and copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet website that contains reports and other information regarding
issuers, such as First Solar, that file electronically with the SEC. The SECs Internet website
is located at http://www.sec.gov.
Executive Officers of the Registrant
Our executive officers and their ages and positions as of February 19, 2010, were as follows:
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Name |
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Age |
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Position |
Michael J. Ahearn
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53 |
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Executive Chairman |
Robert J. Gillette
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49 |
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Chief Executive Officer |
Bruce Sohn
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48 |
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President |
Jens Meyerhoff
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45 |
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Chief Financial Officer |
Mary Beth Gustafsson
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50 |
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Executive Vice President, General Counsel and
Secretary |
TK Kallenbach
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50 |
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Executive Vice President, Marketing and Product
Management |
David Eaglesham
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48 |
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Chief Technology Officer |
Carol Campbell
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58 |
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Executive Vice President, Human Resources |
James Zhu
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48 |
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Chief Accounting Officer |
Michael J. Ahearn serves as Executive Chairman of First Solar and served as CEO from August
2000 to September 2009. Prior to First Solar, he was Partner and President of the equity
investment firm, JWMA (formerly True North Partners, L.L.C.). Prior to joining JWMA, Mr. Ahearn
practiced law as a partner in the firm of Gallagher & Kennedy. Mr. Ahearn has served on the
boards of Arizona Technology Enterprises, Arizona State University Research Park, Homeward
Bound, the Arizona Science Museum and currently serves on the board of the
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German Marshall Fund of the United States. Mr. Ahearn holds a B.A. in Finance and a J.D.
from Arizona State University.
Robert J. Gillette joined First Solar in October 2009 as Chief Executive Officer. Prior to
joining First Solar, Mr. Gillette served as President and Chief Executive Officer of Honeywell
Aerospace since January 2005. Honeywell Aerospace, headquartered in Phoenix, Arizona, is
Honeywell Internationals largest business group with current sales of more than $12 billion
annually. In this role, Mr. Gillette led Honeywell Aerospaces three main businesses Air
Transport & Regional, Business & General Aviation, and Defense & Space with more than 40,000
associates at nearly 100 worldwide manufacturing and service sites. Prior to this assignment,
Mr. Gillette had served as President and Chief Executive Officer of Honeywell Transportation
Systems since July 2001. Mr. Gillette holds a bachelors of science degree in Finance from
Indiana University.
Bruce Sohn has served as President of First Solar since March 2007. Mr. Sohn served as a
director of First Solar from July 2003 until June 2009. Prior to joining First Solar as
President, Mr. Sohn worked at Intel Corporation for 24 years. He is a senior member of IEEE and
a certified Jonah. Mr. Sohn has been a guest lecturer at several universities, including the
Massachusetts Institute of Technology and Stanford University. Mr. Sohn holds a degree in
Materials Science and Engineering from the Massachusetts Institute of Technology.
Jens Meyerhoff joined First Solar in May 2006 as Chief Financial Officer. Prior to joining
First Solar, Mr. Meyerhoff was the Chief Financial Officer of Virage Logic Corporation, a
provider of embedded memory intellectual property for the design of integrated circuits, from
January 2006 to May 2006. Mr. Meyerhoff was employed by FormFactor, Inc., a manufacturer of
advanced wafer probe cards, as Chief Operating Officer from April 2004 to July 2005, Senior Vice
President of Operations from January 2003 to April 2004 and Chief Financial Officer from August
2000 to March 2005. Mr. Meyerhoff holds a German Wirtschaftsinformatiker degree, which is the
equivalent of a Finance and Information Technology degree, from Daimler Benzs Executive
Training Program.
Mary Beth Gustafsson joined First Solar in October 2008 as Vice President, General Counsel.
She was named Executive Vice President, General Counsel and Secretary in November 2009. Prior to
joining First Solar, Ms. Gustafsson was the Senior Vice President, General Counsel and Secretary
of Trane Inc. (formerly American Standard Companies Inc.) from January 2005 through June 2008.
From June 2008 through September 2008, Ms. Gustafsson was Vice President and Deputy General
Counsel of Ingersoll-Rand Ltd., following Ingersoll-Rands acquisition of Trane. From 2001
through 2005, Ms. Gustafsson held positions of increasing responsibility at American Standard
Companies Inc., including Chief Corporate Counsel and General Counsel for the companys global
air conditioning business. Ms. Gustafsson holds a B.A. in English Literature from Boston
University, and a J.D. from The University of Michigan Law School.
TK Kallenbach joined First Solar in December 2009 as Executive Vice President of Marketing
and Product Management. Prior to joining First Solar, Mr. Kallenbach was a senior executive at
Honeywell Aerospace where he led strategic planning, product marketing, product management,
mergers and acquisitions and marketing communications. His organization created and drove
Honeywell Aerospace strategy through product portfolio integration and product line management.
Mr. Kallenbach began his career at Honeywell (formerly AlliedSignal) in 1979, where he held a
variety of senior technical leadership positions, including Vice President of Engineering and
Technology for Aerospace Electronics, Defense & Space Electronic Systems, and Propulsion Engines
and Systems, and senior business leadership positions including Vice President of Business
Aviation, Director of HTF7000 Propulsion System, and Director of Helicopter Engines. Mr.
Kallenbach holds both a B.S. in Mechanical & Aerospace Engineering and a Masters of Business
Administration from Arizona State University.
David Eaglesham joined First Solar in June 2006 as Vice President Technology and became
Chief Technology Officer in November 2009. Prior to joining First Solar, he was Director of
Advanced Technologies at Applied Materials. He also previously worked as Chief Technologist at
Lawrence Livermore and as Director of Electronic Device Research at Bell Labs. He was Materials
Research Society President in 2005. Mr. Eaglesham has a PhD in Physics from the University of
Bristol.
Carol Campbell joined First Solar in March 2006 as Director of Human Resources and was
named Vice President of Human Resources in March 2007. She became the Companys Executive Vice
President of Human Resources in November 2009. Prior to joining First Solar, she was the
Regional Director of Human Resources for
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North America at the Dana Corporation, where she was responsible for all Dana plants in
the United States, Canada, and Mexico. Ms. Campbell was with Dana for 20 years, progressing
through levels of greater responsibility in the Legal and Human Resource Departments. Ms.
Campbell holds a Professional Human Resources certification through the Society of Human
Resources Management and has extensive experience successfully developing and running highly
effective HR organizations in complex and rapidly changing environments. Ms. Campbell holds a
B.A. in Business from Heidelberg College.
James Zhu serves as First Solars Chief Accounting Officer. Mr. Zhu joined the company as
Vice President, Corporate Controller in June 2007. Prior to joining First Solar, Mr. Zhu served
as Assistant Controller and then Vice President, Corporate Controller for Salesforce.com from
May 2004 to May 2007. From July 1999 through April 2004, Mr. Zhu held positions of increasing
responsibility at Chiron Corporation (acquired by Novartis International AG in April 2006),
including Associate Director and Accounting Manager. Prior to joining Chiron Corporation, Mr.
Zhu worked at KPMG, LLP. Mr. Zhu is a Certified Public Accountant and holds a B.A. in Economics
from China and an M.B.A. in Accounting from Golden Gate University.
Item 1A: Risk Factors
An investment in our stock involves a high degree of risk. You should carefully consider
the following information, together with the other information in this Annual Report on Form
10-K, before buying shares of our stock. If any of the following risks or uncertainties occur,
our business, financial condition and results of operations could be materially and adversely
affected and the trading price of our stock could decline.
Risks Related to Our Markets and Customers
If photovoltaic technology is not suitable for widespread adoption, or if sufficient demand for
solar modules does not develop or takes longer to develop than we anticipate, our net sales and
profit may flatten or decline and we may be unable to sustain profitability.
The solar energy market is at a relatively early stage of development and the extent to
which solar modules will be widely adopted is uncertain. If photovoltaic technology proves
unsuitable for widespread adoption or if demand for solar modules fails to develop sufficiently,
we may be unable to grow our business or generate sufficient net sales to sustain profitability.
In addition, demand for solar modules in our targeted markets including Germany, Italy,
Spain, France, the United States, Canada, China and Australia may not develop or may develop
to a lesser extent than we anticipate. Many factors may affect the viability of widespread
adoption of photovoltaic technology and demand for solar modules, including the following:
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cost-effectiveness of the electricity generated by photovoltaic power systems compared to
conventional energy sources and products, including conventional energy sources, such as
natural gas, and other non-solar renewable energy sources, such as wind; |
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availability and substance of government subsidies, incentives and renewable portfolio
standards to support the development of the solar energy industry; |
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performance and reliability of PV systems and thin film technology compared to conventional
and other non-solar renewable energy sources and products; |
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success of other renewable energy generation technologies, such as hydroelectric, tidal,
wind, geothermal, solar thermal, concentrated photovoltaic, and biomass; |
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fluctuations in economic and market conditions that affect the price of, and demand for,
conventional and non-solar renewable energy sources, such as increases or decreases in the
price of oil, natural gas and other fossil fuels; and |
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fluctuations in capital expenditures by end-users of solar modules, which tend to decrease
when the economy slows and interest rates increase. |
16
Reduced growth in or the reduction, elimination or expiration of government subsidies, economic
incentives and other support for on-grid solar electricity applications, including the
anticipated feed-in tariff reductions in Germany and certain other core markets, could reduce
demand and/or price levels for our solar modules, and limit our growth or lead to a reduction
in our net sales, and adversely impact our operating results.
We believe that the near-term growth of the market for on-grid applications, where solar
energy is used to supplement the electricity a consumer purchases from the utility network,
depends significantly on the availability and size of government subsidies and economic
incentives. Federal, state and local governmental bodies in many countries, most notably
Germany, Italy, Spain, France, the United States, Canada, China, India, Australia, Greece and
Portugal have provided subsidies in the form of feed-in tariffs, rebates, tax incentives and
other incentives to end-users, distributors, systems integrators and manufacturers of
photovoltaic products. Many of these jurisdictions, including the majority of U.S. states and
numerous European Union countries, have adopted renewable portfolio standards in which the
government requires jurisdictions or regulated utilities to supply a portion of their total
electricity from specified sources of renewable energy, such as solar, wind and hydroelectric
power. Many of these government incentives expire, phase out over time, require renewal by the
applicable authority or may be amended. A summary of recent developments in the major government
subsidy programs in our core markets follows. We expect the feed-in tariff in Germany and
certain other core markets to be reduced earlier than previously expected, and such reductions
could reduce demand and/or price levels for our solar modules, lead to a reduction in our net
sales and adversely impact our operating results.
German feed-in tariffs will be adjusted earlier than previously expected, and any downwards
adjustment could reduce demand for our solar modules, lead to a reduction in our net sales and
adversely impact our operating results. Currently, Germany, which accounted for approximately
65% of our net sales in 2009, is the largest market for our modules, and thus recently proposed
changes to German feed-in tariffs could significantly impact our results of operations. A
reduction in the PV feed-in tariff is currently under discussion and will most likely come into
effect in the second or third quarter of 2010. The amount of the FiT reductions are expected to
vary among roof-mounted applications, non-agricultural land free field applications and
agricultural land free field applications. A significant reduction in the FiT for agricultural
land free field applications in particular would likely cause a significant decline in demand
for PV solar systems on agricultural land in Germany and contribute to a migration toward roof
mounted applications and non-agricultural land free field applications. Overall, reductions in
the German feed-in tariffs, including any potential further reductions, could result in a
significant decline in demand and price levels for photovoltaic products in Germany, which could
have a material adverse effect on our business, financial condition or results of operations.
In France, a new decree effective January 2010 provides for lower feed-in tariffs for all
applications (including, as in Germany, varying reductions for rooftop applications and free
field applications) while introducing, among other things, a departmental bonus which makes free
field projects in the northern regions of France more attractive. The new decree does not have
an expiry date, but can be amended at any time.
In Italy, the current legislation provides that the existing feed-in tariff will be in
effect until the expiration of a 14 month transition period that will begin once 1.2GWof
photovoltaic systems are installed under the existing feed-in tariff. It is expected that the
Italian government will propose and enact a new feed-in tariff before the end of 2010. Current
proposals reflect significant FiT reductions, particularly for ground mounted applications. We
cannot be certain of the level of such new feed-in tariff. If the level of such feed-in tariff
is not adequate to promote the development of the PV industry or PV projects in Italy, our
ability to pursue an expansion strategy in Italy would be adversely affected.
In Spain, the current legislation is scheduled to be reviewed by January 1, 2012; however,
an earlier FiT adjustment is possible.
In the United States, California has been the state where the majority of solar
installations and solar power module and system sales have taken place during the past five
years. The state of Californias RPS goal of 33% of electricity from renewable sources by 2020,
currently in the form of an executive order from the Governors office, is the most significant
RPS program in the United States in magnitude and is contributing to the expansion of the
utility-scale solar systems market in that state. However, the continued effectiveness of this
RPS program could be negatively impacted if the RPS goal is not passed by the CA legislature and
signed into law. See Item 1A: Risk
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Factors Our ability to pursue an expansion strategy in California beyond existing projects
may be adversely affected if California is unable to achieve a 33% renewable mandate through
law below.
The American Recovery and Reinvestment Act of 2009 provides for certain measures intended
to benefit on-grid solar electricity generation and other renewable energy initiatives,
including (1) a cash grant in lieu of the 30% federal investment tax credit for solar
installations that are placed into service during 2009 and 2010 or that begin construction prior
to December 31, 2010 and are placed into service by January 1, 2017, and (2) a 50% bonus
depreciation for installations placed in service during 2009. Various legislation has been
proposed to extend or enhance the 30% grant in lieu of the tax credit as well as bonus
depreciation. However, enactment of the extension or enhancement of such incentives is highly
uncertain. The failure to extend or enhance these programs may reduce tax equity availability
(in the case of the grant expiration) which may adversely affect our ability to arrange
financing for utility-scale projects and may otherwise adversely affect the attractiveness of
the U.S. solar market.
In Ontario, Canada, a new feed-in tariff program was introduced in September 2009 and
replaced the Renewable Energy Standard Offer Program (RESOP) as the primary subsidy program for
future renewable energy projects. In order to participate in the Ontario feed-in tariff program,
certain provisions relating to minimum required domestic content and land use restrictions for
solar installations must be satisfied. The new domestic content and land restriction rules do
not apply to our Sarnia solar project and the other projects governed by RESOP contracts that we
acquired in connection with our acquisition of the solar power project development business of
OptiSolar Inc. in April 2009. However, our Ontario projects in earlier stages of development
that are not governed by RESOP contracts, as well as any potential new projects in Ontario, will
be subject to such domestic content and land restriction rules. As these rules are currently
written, we will be unable to fully satisfy such rules (in particular the domestic content
requirement rules), thus projects incorporating our modules will not qualify for the Ontario
feed-in tariff. In the event the Ontario domestic content and land use restriction rules are not
sufficiently modified, our ability to participate in the Ontario feed-in tariff program for
future projects will be substantially reduced and possibly completely eliminated, and thus our
ability to pursue an expansion strategy in Ontario, Canada beyond our existing RESOP projects
would be adversely affected.
In China, governmental authorities have not adopted a feed-in tariff policy and currently
award solar projects through either a project tendering process or bi-lateral negotiations.
While the solar industry generally anticipates that China will adopt a solar feed-in tariff,
there is no guarantee this will occur in a timely manner or at all or that any feed-in tariff
will be economically viable. Without a feed-in tariff, the size and attractiveness of Chinas
solar market may be limited and we may be unable to sell into China at an attractive price,
limiting one of our anticipated growth markets.
In Australia, the large-scale solar industry is in its infancy, and despite several
encouraging government funded initiatives to promote large-scale solar generation, it is
uncertain whether such programs can be successfully executed.
In 2009, India announced its National Solar Mission, which includes a goal of installing
20GW of solar by 2022. India is expected to announce a feed-in tariff for the first phase of the
National Solar Mission in 2010. There is no guarantee that India will maintain its current 20GW
by 2022 goal or adopt the required policies to meet that goal, without which, the size and
attractiveness of Indias solar market may be limited and we may be unable to sell modules or
systems in India at an attractive price, limiting one of our anticipated growth markets.
Emerging subsidy programs may require an extended period of time to attain effectiveness
because the applicable permitting and grid connection processes associated with these programs
can be lengthy and administratively burdensome.
In addition, if any of these statutes or regulations is found to be unconstitutional, or is
reduced or discontinued for other reasons, sales prices and/or volumes of our solar modules in
these countries could decline significantly, which could have a material adverse effect on our
business, financial condition and results of operations.
Electric utility companies or generators of electricity from fossil fuels or other
renewable energy sources could also lobby for a change in the relevant legislation in their
markets to protect their revenue streams.
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Reduced growth in or the reduction, elimination or expiration of government subsidies and
economic incentives for on-grid solar energy applications, especially those in our target
markets, could limit our growth or cause our net sales to decline and materially and adversely
affect our business, financial condition and results of operations.
Our ability to pursue an expansion strategy in California beyond existing projects may be
adversely affected if California is unable to achieve a 33% renewable mandate through law.
California currently requires its investor-owned utilities (IOUs) to procure 20% of their
electricity supplies through eligible renewable energy resources by 2010. In addition,
California, through Executive Order has established a utility procurement goal of 33% renewable
electricity by 2020. Due to the threat of penalties under the current law, investor-owned
utilities have the incentive to comply and have therefore signed long-term contracts to meet the
20% procurement requirement. However, since the 33% procurement of renewable electricity by 2020
goal is not enforceable through law, it is conceivable that renewable energy procurement in
California could peak around 20% of the IOUs electricity retail sales in 2010. If the state
legislature and Governors office are unable to adopt legislation that could be signed into law
by the end of 2010, the viability of the 33% RPS program would remain at risk. Californias
current financial difficulties could contribute to an environment in which the 33% RPS program
could be questioned. In addition, any weakening or delay of the 33% RPS program could contribute
to, or be accompanied by, increased project execution risks, delay, or costs relating to
California authorities, such as the California Independent System Operator. Under such a
scenario, our ability to execute a long-term expansion plan to develop additional large-scale PV
projects in California could be adversely affected.
An increase in interest rates or lending rates or tightening of the supply of capital in the
global financial markets (including a reduction in total tax equity availability) could make it
difficult for end-users to finance the cost of a PV system and could reduce the demand for our
solar modules and/or lead to a reduction in the average selling price for photovoltaic modules.
Many of our customers and our systems business depend on debt financing to fund the initial
capital expenditure required to develop, build and purchase a PV system. As a result, an
increase in interest rates or lending rates could make it difficult for our customers or our
systems business to secure the financing necessary to develop, build, purchase or install a PV
system on favorable terms, or at all, and thus lower demand for our solar modules which could
limit our growth or 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 develop, build, purchase or
install a PV 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 and/or lending rates could lower
an investors return on investment in a PV system, increase equity return requirements 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 project debt
financing or tax equity investments could reduce the number of solar projects that receive
financing and thus lower demand for solar modules. As described above under Item 1: Business
Sales and Marketing Economic Incentives, the 30% grant in lieu of the federal investment tax
credit under the ARRA is set to expire and unless extended, will not be available for solar
installations that begin construction on or after January 1, 2011. If such program is not
extended, total tax equity availability could be reduced which may adversely affect our ability
to arrange financing for utility-scale projects and may adversely affect the attractiveness of
the U.S. solar market.
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. 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 Supply Contracts,
especially if demand for PV systems softens or supply of solar modules increases. Also, we may
decide to lower our average selling price to certain customers in certain markets in response to
changes in economic circumstances of our customers, their end markets
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or the capital markets. See Item 1: Business Segment Information Components Business
Customers for a description of previous pricing adjustments under our Long-Term Supply
Contracts.
We currently depend on a limited number of customers, with five customers accounting for a
majority of our components business net sales last year. The loss of, or a significant
reduction in orders from, any of these customers could significantly reduce our net sales and
negatively impact our operating results.
We currently sell substantially all of our solar modules to customers headquartered
throughout the European Union. During 2009, our five largest customers for our components
business each accounted for between 10% and 19% of our component business net sales. Our
customer base within our components business is currently concentrated to a significant extent
in Germany, and therefore the likely additional German feed-in tariff reductions currently under
discussion could reduce demand and/or price levels for our modules sold to these customers. 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. Our customers face significant challenges under current economic conditions, including
lack of capital to finance solar projects and rising costs associated with leasing or otherwise
acquiring land and rooftops for solar projects. We believe that we can mitigate this risk by
re-allocating modules to other customers if the need arises, but we may be unable, in whole or
in part, to mitigate the reduced demand for our modules. In the event that we determine that our
planned production of solar modules exceeds the demand we anticipate, we may decide to reduce or
halt production of solar modules in our manufacturing facilities. However, we may be unable to
anticipate and respond to the oversupply of solar modules because we have limited visibility
into our customers inventories.
Risks Related to Regulations
Existing regulations and policies and changes to these regulations and policies may present
technical, regulatory and economic barriers to the purchase and use of photovoltaic products,
which may significantly reduce demand for our solar modules.
The market for electricity generation products is heavily influenced by foreign, federal,
state and local government regulations and policies concerning the electric utility industry, as
well as policies promulgated by electric utilities. These regulations and policies often relate
to electricity pricing and technical interconnection of customer-owned electricity generation.
In the United States and in a number of other countries, these regulations and policies have
been modified in the past and may be modified again in the future. These regulations and
policies could deter end-user purchases of photovoltaic products and investment in the research
and development of photovoltaic technology. For example, without a mandated regulatory exception
for photovoltaic systems, utility customers are often charged interconnection or standby fees
for putting distributed power generation on the electric utility grid. If these interconnection
standby fees were applicable to PV systems, it is likely that they would increase the cost to
our end-users of using PV systems which could make them less desirable, thereby harming our
business, prospects, results of operations and financial condition. In addition, electricity
generated by PV systems mostly competes with expensive peak hour electricity, rather than the
less expensive average price of electricity. Modifications to the peak hour pricing policies of
utilities, such as to a flat rate for all times of the day, would require PV systems to achieve
lower prices in order to compete with the price of electricity from other sources.
We anticipate that our solar modules and their installation will be subject to oversight
and regulation in accordance with national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and metering and related matters. It
is difficult to track the requirements of individual states and design equipment to comply with
the varying standards. Any new government regulations or utility policies pertaining to our
solar modules may result in significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction in demand for our solar modules.
Environmental obligations and liabilities could have a substantial negative impact on our
financial condition, cash flows and profitability.
Our operations involve the use, handling, generation, processing, storage, transportation
and disposal of hazardous materials and are subject to extensive environmental laws and
regulations at the national, state, local and
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international level. These environmental laws and regulations include those governing the
discharge of pollutants into the air and water, the use, management and disposal of hazardous
materials and wastes, the cleanup of contaminated sites and occupational health and safety. We
have incurred and will continue to incur significant costs and capital expenditures in complying
with these laws and regulations. In addition, violations of, or liabilities under, environmental
laws or permits may result in restrictions being imposed on our operating activities or in our
being subjected to substantial fines, penalties, criminal proceedings, third party property
damage or personal injury claims, cleanup costs or other costs. While we believe we are
currently in substantial compliance with applicable environmental requirements, future
developments such as more aggressive enforcement policies, the implementation of new, more
stringent laws and regulations, or the discovery of presently unknown environmental conditions
may require expenditures that could have a material adverse effect on our business, results of
operations and financial condition.
In addition, our products contain cadmium telluride and cadmium sulfide. Elemental cadmium
and certain of its compounds are regulated as hazardous due to the adverse health effects that
may arise from human exposure. Although the risks of exposure to cadmium telluride are not
believed to be as serious as those relating to exposure to elemental cadmium, the chemical,
physical and toxicological properties of cadmium telluride have not been thoroughly investigated
and reported. We maintain engineering controls to minimize our associates exposure to cadmium
or cadmium compounds and require our associates who handle cadmium compounds to follow certain
safety procedures, including the use of personal protective equipment such as respirators,
chemical goggles and protective clothing. In addition, we believe the risk of exposure to
cadmium or cadmium compounds from our end-products is limited by the fully encapsulated nature
of these materials in our products, the physical properties of cadmium compounds used in our
products and the implementation in 2005 of our collection and recycling program for our solar
modules. While we believe that these factors and procedures are sufficient to protect our
associates, end-users and the general public from cadmium exposure, we cannot assure that human
or environmental exposure to cadmium or cadmium compounds used in our products will not occur.
Any such exposure could result in future third-party claims against us, as well as damage to our
reputation and heightened regulatory scrutiny of our products, which could limit or impair our
ability to sell and distribute our products. The occurrence of future events such as these could
have a material adverse effect on our business, financial condition or results of operations.
The use of cadmium in various products is also coming under increasingly stringent
governmental regulation. Future regulation in this area could impact the manufacture, sale,
collection and recycling of solar modules and could require us to make unforeseen environmental
expenditures or limit our ability to sell and distribute our products. For example, European
Union Directive 2002/95/EC on the Restriction of the Use of Hazardous Substances in electrical
and electronic equipment (RoHS Directive), restricts the use of certain hazardous substances,
including cadmium, in specified products. Other jurisdictions, such as China have adopted
similar legislation or are considering doing so. Currently, PV solar modules are not subject to
the RoHS Directive; however, the RoHS Directive allows for future amendments subjecting
additional products to the requirements and the scope. Applicability and the products included
in the Directive may also change. In December 2008, the European Commission issued its proposed
revision of the RoHS Directive. This proposed revision did not include photovoltaic solar
modules in the scope of RoHS, but is now being amended by both the European Parliament and the
European Union Members States as part of the normal European Union legislative process. The
European Council and the European Parliament are currently considering an open scope approach
to the RoHS Directive under which all Electrical and Electronic Equipment (EEE) products would
be included in the scope of the RoHS Directive unless specifically excluded or exempted from
coverage. As part of these discussions, exclusion for PV panels from the RoHS Directive is being
considered. A final legislative agreement on the RoHS Directive is not expected until 2011 at
the earliest. If PV modules are included in the scope of RoHS without an exemption or exclusion,
we would be required to redesign our solar modules to eliminate cadmium in order to continue to
offer them for sale within the European Union, which would be impractical. In such event, the
European Union market would be in effect closed to us, which could have a material adverse
effect on our business, financial condition and results of operations. In 2009, 86% of our total
net sales were generated from module sales in the European Union. In addition, some of our
competitors are increasingly focusing on our modules use of cadmium telluride in an attempt to
gain a competitive advantage over us. If such actions are successful, they could result in a
loss of sales and potentially limit our growth.
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Risks Related to our Operations, Manufacturing and Technology
Our limited operating history may not serve as an adequate basis to judge our future prospects
and results of operations.
We have a limited operating history. Although we began developing our predecessor
technology in 1987, we did not launch commercial operations until we qualified our pilot
production line in January 2002. We qualified the first production line at our Ohio plant in
November 2004, the second and third production lines at our Ohio plant in August 2006, our
German plant in the third quarter of 2007, and our Malaysian plants in 2008 and 2009. Because
these production lines have only been in operation for a limited period of time, our historical
operating results may not provide a meaningful basis for evaluating our business, financial
performance and prospects. While our net sales grew from $135.0 million in 2006 to $2.1 billion
in 2009, we may be unable to achieve similar growth, or grow at all, in future periods. Our
ability to achieve similar growth in future periods is also affected by current economic
conditions. Our past results occurred in an environment where, among other things, capital was
generally more accessible to our customers to finance the cost of developing solar projects and
economic incentives for solar power in certain core markets (such as the German feed-in tariff)
were more favorable. Accordingly, you should not rely on our results of operations for any prior
period as an indication of our future performance. See Item 1: Business Segment Information
Components Business Customers for a description of previous pricing adjustments under our
Long-Term Supply Contracts.
We face intense competition from manufacturers of crystalline silicon solar modules, thin film
solar modules and solar thermal and concentrated photovoltaic systems; if global supply exceeds
global demand, it could lead to a reduction in the average selling price for photovoltaic
modules.
The solar energy and renewable energy industries are both highly competitive and
continually evolving as participants strive to distinguish themselves within their markets and
compete with the larger electric power industry. Within the global photovoltaic industry, we
face competition from crystalline silicon solar module manufacturers, other thin film solar
module manufacturers and companies developing solar thermal and concentrated photovoltaic
technologies.
Even if demand for solar modules continues to grow, the rapid expansion plans of many solar
cell and module manufacturers could create periods where supply exceeds demand. In addition, we
believe the significant decrease in the cost of silicon feedstock will provide significant
reductions in the manufacturing cost of crystalline silicon solar modules and lead to pricing
pressure for solar modules and potentially the oversupply of solar modules, including in key
markets such as Germany and Spain.
During any such period, our competitors could decide to reduce their sales price in
response to competition, even below their manufacturing cost, in order to generate sales. As a
result, we may be unable to sell our solar modules at attractive prices, or for a profit, during
any period of excess supply of solar modules, which would reduce our net sales and adversely
affect our results of operations. Also, we may decide to lower our average selling price to
certain customers in certain markets in response to competition.
Thin film technology has a short history and our thin film technology and solar modules may
perform below expectations; problems with product quality or performance may cause us to incur
warranty expenses, damage our market reputation and prevent us from maintaining or increasing
our market share.
Researchers began developing thin film semiconductor technology over 20 years ago, but were
unable to integrate the technology into a solar module production line until recently. Our
oldest active production line has been in operation since November 2004, and the oldest solar
modules manufactured during the qualification of our pilot line have been in use since 2001. As
a result, our thin film technology and solar modules do not have a sufficient operating history
to confirm how our solar modules will perform over their estimated 25-year useful life. We
perform a variety of quality and life tests under different conditions. However, if our thin
film technology and solar modules perform below expectations, we could lose customers and face
substantial warranty expense.
Our solar modules are sold with a five-year materials and workmanship warranty for
technical defects and a 25-year warranty against declines of more than 10% of their initial
rated power in the first 10 years following their
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installation and 20% of initial rated power in the following 15 years, respectively. As a
result, we bear the risk of extensive warranty claims long after we have sold our solar modules
and recognized net sales. As of December 26, 2009, our accrued warranty liability was $22.6
million, of which, $8.2 million was classified as current and $14.4 million was classified as
noncurrent.
While our power output warranty extends for 25 years, our oldest solar modules manufactured
during the qualification of our pilot production line have only been in use since 2001. Because
of the limited operating history of our solar modules, we have been required to make assumptions
regarding the durability and reliability of our solar modules. Our assumptions could prove to be
materially different from the actual performance of our solar modules, causing us to incur
substantial expense to repair or replace defective solar modules in the future. For example, our
glass-on-glass solar modules could break, delaminate or experience power degradation in excess
of expectations, our manufacturing operations could be subject to process variations that could
cause affected modules to underperform compared to our expectations. Any widespread product
failures may damage our market reputation and cause our sales to decline and require us to
repair or replace the defective modules, which could have a material adverse effect on our
financial results.
If our estimates regarding the future cost of collecting and recycling our solar modules are
incorrect, we could be required to accrue additional expenses at and from the time we realize
our estimates are incorrect and face a significant unplanned cash burden.
We pre-fund our estimated future obligation for collecting and recycling our solar modules
based on the present value of the expected future cost of collecting and recycling the modules,
which includes the cost of packaging the solar modules for transport, the cost of freight from
the solar modules installation site to a recycling center, the material, labor and capital
costs of the recycling process and an estimated third-party profit margin and return on risk for
collection and recycling. We base our estimate on our experience collecting and recycling solar
modules that do not pass our quality control tests and solar modules returned under our warranty
and on our expectations about future developments in recycling technologies and processes and
economic conditions at the time the solar modules will be collected and recycled. If our
estimates prove incorrect, we could be required to accrue additional expenses at and from the
time we realize our estimates are incorrect and also face a significant unplanned cash burden at
the time we realize our estimates are incorrect or end-users return their solar modules, which
could harm our operating results. In addition, our end-users can return their solar modules at
any time. As a result, we could be required to collect and recycle our solar modules earlier
than we expect and before recycling technologies and processes improve.
Our failure to further refine our technology and develop and introduce improved photovoltaic
products could render our solar modules uncompetitive or obsolete and reduce our net sales and
market share.
We will need to invest significant financial resources in research and development to
continue to improve our module conversion efficiency and to otherwise keep pace with
technological advances in the solar energy industry. However, research and development
activities are inherently uncertain and we could encounter practical difficulties in
commercializing our research results. We seek to continuously improve our products and
processes, and the resulting changes carry potential risks in the form of delays, additional
costs or other unintended contingencies. In addition, our significant expenditures on research
and development may not produce corresponding benefits. Other companies are developing a variety
of competing photovoltaic technologies, including copper indium gallium diselenide and amorphous
silicon, which could produce solar modules that prove more cost-effective or have better
performance than our solar modules. In addition, other companies could potentially develop a
highly reliable renewable energy system that mitigates the intermittent power production
drawback of many renewable energy systems, or offers other value-added improvements from the
perspective of utilities and other system owners, in which case such companies could compete
with us even if the levelized cost of electricity associated with such new system is higher than
that of our systems. As a result, our solar modules may be rendered obsolete by the
technological advances of our competitors, which could reduce our net sales and market share.
In addition, we often forward price our products and services (including through our
Long-Term Supply Contracts and power purchase agreements) in anticipation of future cost
reductions, and thus an inability to further
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refine our technology and execute our long-term cost reduction objectives could adversely affect
our margins and operating results.
Our failure to protect our intellectual property rights may undermine our competitive position
and litigation to protect our intellectual property rights or defend against third-party
allegations of infringement may be costly.
Protection of our proprietary processes, methods and other technology is critical to our
business. Failure to protect and monitor the use of our existing intellectual property rights
could result in the loss of valuable technologies. We rely primarily on patents, trademarks,
trade secrets, copyrights and contractual restrictions to protect our intellectual property. As
of December 26, 2009, we held 22 patents in the United States, which will expire at various
times between 2012 and 2026, and had 96 patent applications pending. We also held 28 patents and
had over 100 patent applications pending in foreign jurisdictions. Our existing patents and
future patents could be challenged, invalidated, circumvented or rendered unenforceable. Our
pending patent applications may not result in issued patents, or if patents are issued to us,
such patents may not be sufficient to provide meaningful protection against competitors or
against competitive technologies.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological
innovation and other trade secrets to develop and maintain our competitive position. While we
generally enter into confidentiality agreements with our associates and third parties to protect
our intellectual property, such confidentiality agreements are limited in duration and could be
breached and may not provide meaningful protection for our trade secrets or proprietary
manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use
or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain
knowledge of our trade secrets through independent development or legal means. The failure of
our patents or confidentiality agreements to protect our processes, equipment, technology, trade
secrets and proprietary manufacturing expertise, methods and compounds could have a material
adverse effect on our business. In addition, effective patent, trademark, copyright and trade
secret protection may be unavailable or limited in some foreign countries, especially any
developing countries into which we may expand our operations. In some countries we have not
applied for patent, trademark or copyright protection.
Third parties may infringe or misappropriate our proprietary technologies or other
intellectual property rights, which could have a material adverse effect on our business,
financial condition and operating results. Policing unauthorized use of proprietary technology
can be difficult and expensive. Also, litigation may be necessary to enforce our intellectual
property rights, protect our trade secrets or determine the validity and scope of the
proprietary rights of others. We cannot assure you that the outcome of such potential litigation
will be in our favor. Such litigation may be costly and may divert management attention and
other resources away from our business. An adverse determination in any such litigation may
impair our intellectual property rights and may harm our business, prospects and reputation. In
addition, we have no insurance coverage against litigation costs and would have to bear all
costs arising from such litigation to the extent we are unable to recover them from other
parties.
Many of our key raw materials and components are either sole-sourced or sourced by a limited
number of third-party suppliers and their failure to perform could cause manufacturing delays
and impair our ability to deliver solar modules to customers in the required quality and
quantities and at a price that is profitable to us.
Our failure to obtain raw materials and components that meet our quality, quantity and cost
requirements in a timely manner could interrupt or impair our ability to manufacture our solar
modules or increase our manufacturing cost. Many of our key raw materials and components are
either sole-sourced or sourced by a limited number of third-party suppliers. As a result, the
failure of any of our suppliers to perform could disrupt our supply chain and impair our
operations. In addition, many of our suppliers are small companies that may be unable to supply
our increasing demand for raw materials and components as we implement our planned rapid
expansion. We may be unable to identify new suppliers or qualify their products for use on our
production lines in a timely manner and on commercially reasonable terms. Raw materials and
components from new suppliers may also be less suited for our technology and yield solar modules
with lower conversion efficiencies, higher failure rates and higher rates of degradation than
solar modules manufactured with the raw materials from our current suppliers. A constraint on
our production may cause us to be unable to meet our obligations under our Long-Term Supply
Contracts, which would have an adverse impact on our financial results.
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A disruption in our supply chain for cadmium telluride, our semiconductor material, could
interrupt or impair our ability to manufacture solar modules.
A key raw material we use in our production process is a cadmium telluride compound.
Tellurium is mainly produced as a by-product of copper refining, and its supply is therefore
largely dependent upon demand for copper. Currently, we purchase these raw materials from a
limited number of suppliers. If our current suppliers or any of our future suppliers are unable
to perform under their contracts or purchase orders, our operations could be interrupted or
impaired. In addition, because our suppliers must undergo a lengthy qualification process, we
may be unable to replace a lost supplier in a timely manner and on commercially reasonable
terms. Our supply of cadmium telluride could also be limited if any of our current suppliers or
any of our future suppliers are unable to acquire an adequate supply of tellurium in a timely
manner or at commercially reasonable prices. If our competitors begin to use or increase their
demand for cadmium telluride, supply could be reduced and prices could increase. If our current
suppliers or any of our future suppliers cannot obtain sufficient tellurium, they could
substantially increase prices or be unable to perform under their contracts. We may be unable to
pass increases in the cost of our raw materials through to our customers because our customer
contracts do not adjust for raw material price increases and are generally for a longer term
than our raw material supply contracts. A reduction in our production could result in our
inability to meet our commitments under our Long-Term Supply Contracts, all of which would have
an adverse impact on our financial results.
Our future success depends on our ability to build new manufacturing plants and add production
lines in a cost-effective manner, both of which are subject to risks and uncertainties.
Our future success depends on our ability to significantly increase both our manufacturing
capacity and production throughput in a cost-effective and efficient manner. If we cannot do so,
we may be unable to expand our business, decrease our cost per watt, maintain our competitive
position, satisfy our contractual obligations or sustain profitability. Our ability to expand
production capacity is subject to significant risks and uncertainties, including the following:
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making changes to our production process that are not properly qualified or that may cause
problems with the quality of our solar modules; |
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delays and cost overruns as a result of a number of factors, many of which may be beyond
our control, such as our inability to secure successful contracts with equipment vendors; |
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our custom-built equipment taking longer and costing more to manufacture than expected and
not operating as designed; |
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delays or denial of required approvals by relevant government
authorities; |
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being unable to hire qualified staff; |
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failure to execute our expansion plans effectively; and |
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manufacturing concentration risk resulting from an expected 24 out of 34 announced
production lines worldwide by the end of 2012 being located in one geographic area, Malaysia. |
If our future production lines are not built in line with our committed schedules it may impair
our growth plans, if our future production lines do not achieve operating metrics similar to
our existing production lines, our solar modules could perform below expectations and cause us
to lose customers.
Currently, our production lines have a limited history of operating at full capacity.
Future production lines could produce solar modules that have lower efficiencies, higher failure
rates and higher rates of degradation than solar modules from our existing production lines, and
we could be unable to determine the cause of the lower operating metrics or develop and
implement solutions to improve performance. Although we will be using the same systematic
replication process to build our French manufacturing center and expand our Malaysian
manufacturing center that we successfully used when building and expanding our existing German
and Malaysian production facilities, our replication risk in connection with building production
lines at our French manufacturing center and other future manufacturing plants could be higher
than our replication risk was in building and expanding our
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existing German and Malaysian production facilities because two of these new production lines
are located in a new geographic area for us, which could entail other factors that may lower
their operating metrics. If we are unable to systematically replicate our production lines to
meet our committed schedules and achieve and sustain similar operating metrics in our future
production lines as we have achieved at our existing production lines, our manufacturing
capacity could be substantially constrained, our manufacturing costs per watt could increase,
and this may impair our growth plans and/or cause us to lose customers, resulting in lower net
sales, higher liabilities and lower net income than we anticipate. In addition, we might be
unable to produce enough solar modules to satisfy our contractual requirements under our
Long-Term Supply Contracts.
Some of our manufacturing equipment is customized and sole sourced. If our manufacturing
equipment fails or if our equipment suppliers fail to perform under their contracts, we could
experience production disruptions and be unable to satisfy our contractual requirements.
Some of our manufacturing equipment is customized to our production lines based on designs
or specifications that we provide to the equipment manufacturer, which then undertakes a
specialized process to manufacture the custom equipment. As a result, the equipment is not
readily available from multiple vendors and would be difficult to repair or replace if it were
to become damaged or stop working. If any piece of equipment fails, production along the entire
production line could be interrupted and we could be unable to produce enough solar modules to
satisfy our contractual requirements under our Long-Term Supply Contracts. In addition, the
failure of our equipment suppliers to supply equipment in a timely manner or on commercially
reasonable terms could delay our expansion plans and otherwise disrupt our production schedule
or increase our manufacturing costs, all of which would adversely impact our financial results.
If we are unable to further increase the number of sellable watts per solar module and reduce
our manufacturing cost per watt, we will be in default under certain of our Long-Term Supply
Contracts and our profitability could decline.
Our Long-Term Supply Contracts either (1) require us to increase the minimum average number
of watts per module over the term of the contract or (2) have a price adjustment for increases
or decreases in the number of watts per module relative to a base number of watts per module.
Our failure to achieve these metrics could reduce our profitability or allow some of our
customers to terminate their contracts. In addition, all of our Long-Term Supply Contracts in
Europe specify a sales price per watt that declines at the beginning of each year through the
expiration date of each contract in 2012. Our profitability could decline if we are unable to
reduce our manufacturing cost per watt by at least the same rate at which our contractual prices
decrease. Furthermore, our failure to reduce cost per watt by increasing our efficiency may
impair our ability to enter new markets that we believe will require lower cost per watt for us
to be competitive and may impair our growth plans.
We may be unable to manage the expansion of our operations effectively.
We expect to continue to expand our business in order to meet our contractual obligations,
satisfy demand for our solar modules and maintain or increase market share. However, depending
on the amount of additional contractual obligations we enter into and our ability to expand our
manufacturing capabilities in accordance with our expectations, we might be unable to produce
enough solar modules to satisfy our contractual requirements under our Long-Term Supply
Contracts and other commitments, in which case we could be in default under such agreements and
our operating results may be adversely affected.
Following the completion of our expansion of our Ohio plant in 2010, we will have grown
from one production line in Ohio in 2005 to 24 production lines with an annual global
manufacturing capacity of approximately 1282MW (based on the fourth quarter of 2009 average per
line run rate at our existing plants). Construction of our two-line French manufacturing
facility is expected to begin in the second half of 2010 and a full annual production capacity
of more than 100MW is expected to be reached in early 2012. Our eight-line Malaysian expansion
is expected to start production in the first half of 2011.
To manage the continued rapid expansion of our operations, we will be required to continue
to improve our operational and financial systems, procedures and controls and expand, train and
manage our growing associate
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base. Our management will also be required to maintain and expand our relationships with
customers, suppliers and other third parties and attract new customers and suppliers. In
addition, our current and planned operations, personnel, systems and internal procedures and
controls might be inadequate to support our future growth. If we cannot manage our growth
effectively, we may be unable to take advantage of market opportunities, execute our business
strategies or respond to competitive pressures.
Implementing a new enterprise resource planning system could interfere with our business or
operations and could adversely impact our financial position, results of operations and cash
flows.
We are in the process of implementing a new enterprise resource planning (ERP) system. We
expect to complete Phase 1 of this implementation in the second half of 2010. This project
requires significant investment of capital and human resources, the re-engineering of many
processes of our business, and the attention of many associates and managers who would otherwise
be focused on other aspects of our business. Any disruptions, delays or deficiencies in the
design and implementation of the new ERP system could result in potentially much higher costs
than we had anticipated and could adversely affect our ability to process customer orders, ship
products, provide services and support to customers, bill and track our customers, fulfill
contractual obligations, file SEC reports in a timely manner and/or otherwise operate our
business, or otherwise impact our controls environment, and any of these consequences could have
an adverse effect on our financial position, results of operations and cash flows.
Our substantial international operations subject us to a number of risks, including unfavorable
political, regulatory, labor and tax conditions in foreign countries.
We have significant marketing, distribution and manufacturing operations both within and
outside the United States. In 2009, 86% of our net sales were generated from customers
headquartered in the European Union. In the future, we expect to expand our operations into
China, India and other countries in Europe, Asia and the Middle East and elsewhere; as a result,
we will be subject to the legal, political, social and regulatory requirements and economic
conditions of many jurisdictions. Risks inherent to international operations, include, but are
not limited to, the following:
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difficulty in enforcing agreements in foreign legal systems; |
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foreign countries may impose additional income and withholding taxes or otherwise tax our
foreign operations, impose tariffs or adopt other restrictions on foreign trade and
investment, including currency exchange controls; |
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fluctuations in exchange rates may affect product demand and may adversely affect our
profitability in U.S. dollars to the extent the price of our solar modules and cost of raw
materials, labor and equipment is denominated in a foreign currency; |
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inability to obtain, maintain or enforce intellectual property rights; |
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risk of nationalization of private enterprises; |
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changes in general economic and political conditions in the countries in which we operate,
including changes in the government incentives we are relying on; |
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unexpected adverse changes in foreign laws or regulatory requirements, including those with
respect to environmental protection, export duties and quotas; |
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opaque approval processes in which the lack of transparency may cause delays and increase
the uncertainty of project approvals; |
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difficulty in staffing and managing widespread operations; |
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difficulty in repatriating earnings; |
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difficulty in negotiating a successful collective bargaining agreement in France or other
jurisdictions;
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trade barriers such as export requirements, tariffs, taxes, local content requirements and
other restrictions and expenses, which could increase the price of our solar modules and make
us less competitive in some countries; and |
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difficulty of and costs relating to compliance with the different commercial and legal
requirements of the overseas countries in which we offer and sell our solar modules. |
Our business in foreign markets requires us to respond to rapid changes in market
conditions in these countries. Our overall success as a global business depends, in part, on our
ability to succeed in differing legal, regulatory, economic, social and political conditions. We
may not be able to develop and implement policies and strategies that will be effective in each
location where we do business.
Risks Related to Our Systems Business
Project development or construction activities may not be successful and projects under
development may not receive required permits or construction may not commence as scheduled,
which could increase our costs and impair our ability to recover our investments.
The development and construction of solar power electric generation facilities and other
energy infrastructure projects involve numerous risks. We may be required to spend significant
sums for preliminary engineering, permitting, legal, and other expenses before we can determine
whether a project is feasible, economically attractive or capable of being built. Success in
developing a particular project is contingent upon, among other things:
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negotiation of satisfactory engineering, procurement and construction agreements; |
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receipt of required governmental permits and approvals, including the right to interconnect
to the electric grid; |
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payment of interconnection and other deposits (some of which are
non-refundable); |
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obtaining construction financing; and |
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timely implementation and satisfactory completion of construction. |
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Successful completion of a particular project may be adversely affected by numerous
factors, including: |
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delays in obtaining required governmental permits and approvals; |
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uncertainties relating to land costs for projects on land subject to Bureau of Land
Management procedures; |
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unforeseen engineering problems; |
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construction delays and contractor performance shortfalls; |
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work stoppages; |
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cost over-runs |
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equipment and materials supply; |
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adverse weather conditions; and |
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environmental and geological conditions. |
If we are unable to complete the development of a solar power facility, or fail to meet one
or more agreed target construction milestone dates, we may be subject to liquidated damages
and/or penalties under the EPC agreement or other agreements relating to the project, and we
typically will not be able to recover our investment in the project. Some of these investments
are included as assets on our balance under the line item project assets. If we are unable to
complete the development of a solar power project, we may write-down or write-off some or all of
these capitalized investments, which would have an adverse impact on our net income in the
period in which the loss is recognized. In 2010, we expect to invest a significant amount of
capital to develop projects owned by us or third parties.
We may enter into fixed price EPC contracts in which we act as the general contractor for
our customers in connection with the installation of our solar power systems. All essential
costs are estimated at the time of entering
28
into the EPC contract for a particular project, and these are reflected in the overall price
that we charge our customers for the project. These cost estimates are preliminary and may or
may not be covered by contracts between us or the subcontractors, suppliers and other parties to
the project. In addition, we require qualified, licensed subcontractors to install most of our
systems. Shortages of such skilled labor could significantly delay a project or otherwise
increase our costs. Should miscalculations in planning a project or delays in execution occur
and we are unable to increase commensurately the EPC sales price, we may not achieve our
expected margins or we may be required to record a loss in the relevant fiscal period.
We may be unable to acquire or lease land and/or obtain the approvals, licenses and permits
necessary to build and operate PV power plants in a timely and cost effective manner, and
regulatory agencies, local communities or labor unions may delay, prevent or increase the cost
of construction and operation of the PV plants we intend to build.
In order to construct and operate our PV plants, we need to acquire or lease land and
obtain all necessary local, county, state and federal approvals, licenses and permits. We may be
unable to acquire the land or lease interests needed, may not receive or retain the requisite
approvals, permits and licenses or may encounter other problems which could delay or prevent us
from successfully constructing and operating PV plants. For instance, the California Independent
System Operator has recently modified its transmission interconnection rules, phasing out a
serial process in favor of a cluster process for new projects, and may further modify its rules
in a manner that could negatively impact our favorable position in transmission queues. Certain
of our California projects under development will remain subject to the serial process while
other projects in earlier stages of development, as well as new projects on a going-forward
basis, will be subject to the cluster process. Although the transition to the cluster process is
still evolving and its ultimate impact is not yet fully known, our project transmission cost
could be materially higher than previously estimated under the serial process and our projects
could be delayed or subject to transmission planning timing uncertainties. We also may be
required to post interconnection deposits (which may not be refundable) sooner than previously
estimated under the serial process.
Many of our proposed PV plants are located on or require access through public lands
administered by federal and state agencies pursuant to competitive public leasing and
right-of-way procedures and processes. The authorization for the use, construction and operation
of PV plants and associated transmission facilities on federal, state and private lands will
also require the assessment and evaluation of mineral rights, private rights-of-way and other
easements; environmental, agricultural, cultural, recreational and aesthetic impacts; and the
likely mitigation of adverse impacts to these and other resources and uses. The inability to
obtain the required permits and, potentially, excessive delay in obtaining such permits due, for
example, to litigation, could prevent us from successfully constructing and operating PV plants
and could result in a potential forfeiture of any deposit we have made with respect to a given
project. Moreover, project approvals subject to project modifications and conditions, including
mitigation requirements and costs, could affect the financial success of a given project.
In addition, local labor unions may increase the cost of, and/or lower the productivity of,
project development in Canada and California.
In China our projects are subject to a number of government approvals, including the
approval of a pre-feasibility and feasibility study. Individually, the pre-feasibility and
feasibility study require many different government approvals at the national, provincial and
local levels, and the approval process is discretionary and not fully transparent.
Lack of transmission capacity availability, potential upgrade costs to the transmission grid
and other systems constraints could significantly impact our ability to build PV plants and
generate solar electricity power sales.
In order to deliver electricity from our PV plants to our customers, our projects need to
connect to the transmission grid. The lack of available capacity on the transmission grid could
substantially impact our projects and cause reductions in project size, delays in project
implementation, increases in costs from transmission upgrades and potential forfeitures of any
deposit we have made with respect to a given project. These transmission issues, as well as
issues relating to the availability of large systems such as transformers and switch gear, could
significantly impact our ability to build PV plants and generate solar electricity sales.
29
Our systems business is largely dependent on us and third parties arranging financing from
various sources, which may not be available or may only be available on unfavorable terms or in
insufficient amounts.
The construction of our large utility-scale solar power projects under development by us is
expected in many cases to require project financing, including non-recourse project debt
financing in the bank loan market and institutional debt capital markets. Uncertainties exist as
to whether our projects will be able to access the debt markets in a sufficient magnitude to
finance their construction. If we are unable to arrange such financing or if it is only
available on unfavorable terms, we may be unable to fully execute our systems business plan. In
addition, we generally expect to sell our projects by raising project equity capital from tax
oriented, strategic industry and other equity investors. Such equity sources may not be
available or may only be available in insufficient amounts, in which case our ability to sell
our projects may be delayed or limited and our business, financial condition or results of
operations may be adversely affected.
In addition, for projects in which we provide EPC services but are not the project
developer, our EPC activities are in many cases dependent on the ability of third parties to
purchase our PV plant projects, which, in turn, is dependent on their ability to obtain
financing for such purchases. Depending on prevailing conditions in the credit markets and other
factors, such financing may not be available or may only be available on unfavorable terms or in
insufficient amounts. If third parties are limited in their ability to access financing to
support their purchase of PV power plant projects from us, we may not realize the cash flows
that we expect from such sales, and this could adversely affect our ability to invest in our
business and/or generate revenue. See also the risk factor above entitled An increase in
interest rates or lending rates or tightening of the supply of capital in the global financial
markets (including a reduction in total tax equity availability) could make it difficult for
end-users to finance the cost of a PV system and could reduce the demand for our solar modules
and/or lead to a reduction in the average selling price for photovoltaic modules.
Developing solar power projects may require significant upfront investment prior to the signing
of a power purchase agreement or an EPC contract, which could adversely affect our business and
results of operations.
Our solar power project development cycles, which span the time between the identification
of land and the commercial operation of a PV power plant project, vary substantially and can
take many months or years to mature. As a result of these long project cycles, we may need to
make significant upfront investments of resources (including, for example, large transmission
deposits or other payments, which may be non-refundable) in advance of the signing of PPAs and
EPC contracts and the receipt of any revenue, much of which is not recognized for several
additional months or years following contract signing. Our potential inability to enter into
sales contracts with potential customers after making such upfront investments could adversely
affect our business and results of operations.
Our liquidity may be adversely affected to the extent the project sale market weakens and
we are unable to sell our solar projects on pricing, terms and timing commercially acceptable to
us.
Other Risks
We may not realize the anticipated benefits of past or future acquisitions, and integration of
these acquisitions may disrupt our business and management.
In April 2009, we acquired the solar power project development business of OptiSolar Inc.
and in the future, we may acquire additional companies, project pipelines, products or
technologies or enter into joint ventures or other strategic initiatives. We may not realize the
anticipated benefits of an acquisition and each acquisition has numerous risks. These risks
include the following:
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difficulty in assimilating the operations and personnel of the acquired company; |
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difficulty in effectively integrating the acquired technologies or products with our
current products and technologies; |
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difficulty in maintaining controls, procedures and policies during the transition and
integration;
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30
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disruption of our ongoing business and distraction of our management and associates from
other opportunities and challenges due to integration issues; |
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difficulty integrating the acquired companys accounting, management information and other
administrative systems; |
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inability to retain key technical and managerial personnel of the acquired business; |
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inability to retain key customers, vendors and other business partners of the acquired
business; |
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inability to achieve the financial and strategic goals for the acquired and combined
businesses; |
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incurring acquisition-related costs or amortization costs for acquired intangible assets
that could impact our operating results; |
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potential impairment of our relationships with our associates, customers, partners,
distributors or third party providers of technology or products; |
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potential failure of the due diligence processes to identify significant issues with
product quality, architecture and development or legal and financial liabilities, among other
things; |
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potential inability to assert that internal controls over financial reporting are effective; |
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potential inability to obtain, or obtain in a timely manner, approvals from governmental
authorities, which could delay or prevent such acquisitions; and |
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potential delay in customer purchasing decisions due to uncertainty about the direction of
our product offerings. |
Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not
complete the integration of acquired businesses successfully and in a timely manner, we may not
realize the anticipated benefits of the acquisitions to the extent anticipated, which could
adversely affect our business, financial condition or results of operations.
Our future success depends on our ability to retain our key associates and to successfully
integrate them into our management team.
We are dependent on the services of Michael J. Ahearn, our Executive Chairman, Robert J.
Gillette, our Chief Executive Officer, Bruce Sohn, our President, Jens Meyerhoff, our Chief
Financial Officer, Mary Beth Gustafsson, our Executive Vice President, General Counsel and
Corporate Secretary, Carol Campbell, our Executive Vice President, Human Resources, TK
Kallenbach, our Executive Vice President, Marketing and Product Management, David Eaglesham, our
Chief Technology Officer, and James Zhu, our Chief Accounting Officer and other members of our
senior management team. The loss of Ahearn, Gillette, Sohn, Meyerhoff, Gustafsson, Campbell,
Kallenbach, Eaglesham, Zhu or any other member of our senior management team could have a
material adverse effect on us. There is a risk that we will not be able to retain or replace
these key associates. Several of our current key associates, including Ahearn, Gillette, Sohn,
Meyerhoff, Gustafsson, Campbell, Kallenbach, Eaglesham and Zhu are subject to employment
conditions or arrangements that contain post-employment non-competition provisions. However,
these arrangements permit the associates to terminate their employment with us upon little or no
notice and the enforceability of the non-competition provisions is uncertain.
If we are unable to attract, train and retain key personnel, our business may be materially and
adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train and
retain management, operations and technical personnel. Recruiting and retaining capable
personnel, particularly those with expertise in the photovoltaic industry and thin film
technology, are vital to our success. There is substantial competition for qualified technical
personnel and there can be no assurance that we will be able to attract or retain our technical
personnel. If we are unable to attract and retain qualified associates, our business may be
materially and adversely affected.
31
We may be exposed to infringement or misappropriation claims by third parties, which, if
determined adversely to us, could cause us to pay significant damage awards or prohibit us from
the manufacture and sale of our solar modules or the use of our technology.
Our success depends largely on our ability to use and develop our technology and know-how
without infringing or misappropriating the intellectual property rights of third parties. The
validity and scope of claims relating to photovoltaic technology patents involve complex
scientific, legal and factual considerations and analysis and, therefore, may be highly
uncertain. We may be subject to litigation involving claims of patent infringement or violation
of intellectual property rights of third parties. The defense and prosecution of intellectual
property suits, patent opposition proceedings and related legal and administrative proceedings
can be both costly and time consuming and may significantly divert the efforts and resources of
our technical and management personnel. An adverse determination in any such litigation or
proceedings to which we may become a party could subject us to significant liability to third
parties, require us to seek licenses from third parties, which may not be available on
reasonable terms, or at all, or pay ongoing royalties, require us to redesign our solar module,
or subject us to injunctions prohibiting the manufacture and sale of our solar modules or the
use of our technologies. Protracted litigation could also result in our customers or potential
customers deferring or limiting their purchase or use of our solar modules until the resolution
of such litigation.
Currency translation and transaction risk may negatively affect our net sales, cost of sales
and gross margins and could result in exchange losses.
Although our reporting currency is the U.S. dollar, we conduct our business and incur costs
in the local currency of most countries in which we operate. As a result, we are subject to
currency translation and transaction risk. For example, 86% and 95% of our net sales were
denominated in euro for the years ended December 26, 2009 and December 27, 2008, respectively,
and we expect a large percentage of our net sales to be outside the United States and
denominated in foreign currencies in the future. In addition, our operating expenses for our
plants located outside the U.S. (currently Germany and Malaysia) and our operations for our
systems business in Canada and other European countries will be denominated in the local
currency. Changes in exchange rates between foreign currencies and the U.S. dollar could affect
our net sales and cost of sales and could result in exchange gains or losses. For example, the
weakening of the euro reduced our net sales by $116.1 million during fiscal 2009 compared with
fiscal 2008. In addition, we incur currency transaction risk whenever one of our operating
subsidiaries enters into either a purchase or a sales transaction using a different currency
from our reporting currency. For example, our European Long-Term Supply Contracts specify fixed
pricing in euros through 2012 and do not adjust for changes in the U.S. dollar to euro exchange
rate. We cannot accurately predict the impact of future exchange rate fluctuations on our
results of operations.
We could also expand our business into emerging markets, many of which have an uncertain
regulatory environment relating to currency policy. Conducting business in such emerging markets
could cause our exposure to changes in exchange rates to increase.
Our ability to hedge foreign currency exposure is dependent on our credit profile with the
banks that are willing and able to do business with us. Deterioration in our credit position or
a significant tightening of the credit market conditions could limit our ability to hedge our
foreign currency exposure; and therefore, result in exchange losses.
The Estate of John T. Walton and its affiliates have significant control over us and their
interests may conflict with or differ from interests of other stockholders.
Our largest stockholder, the Estate of John T. Walton and its affiliates, including JCL
Holdings, LLC and JTW Trust No. 1 UAD 9/19/02 (collectively, the Estate), owned approximately
35% of our outstanding common stock at December 31, 2009. As a result, the Estate has
substantial influence over all matters requiring stockholder approval, including the election of
our directors and the approval of significant corporate transactions such as mergers, tender
offers and the sale of all or substantially all of our assets. The interests of the Estate could
conflict with or differ from interests of other stockholders. For example, the concentration of
ownership held by the Estate could delay, defer or prevent a change of control of our company or
impede a merger, takeover or other business combination which a majority of stockholders may
view favorably.
32
If our goodwill, investment in a related party or project assets become impaired, we may be
required to record a significant charge to earnings.
We may be required to record a significant charge to earnings in our financial statements
should we determine that our goodwill, investment in a related party or project assets are
impaired. Such a charge might have a significant impact on our financial position and results of
operations.
As required by accounting rules, we review our goodwill, investment in a related party and
project assets for impairment when events or changes in our business or circumstances indicate
that their fair value might be less than their carrying value. Factors that may be considered a
change in circumstances indicating that the carrying value of our goodwill might not be
recoverable include a significant decline in our stock price and market capitalization, a
significant decline in projections of future cash flows and significantly slower growth rates in
our industry. We are also required to test goodwill for impairment at least annually. We would
write down project assets, which are capitalized on the balance sheet for certain solar power
projects, should we determine that the project is not commercially viable.
Unanticipated changes in our tax provisions, the adoption of a new U.S. tax legislation or
exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the United States and the foreign jurisdictions in which
we operate. Our tax liabilities are affected by the amounts we charge for inventory, services,
licenses, funding and other items in intercompany transactions. We are subject to potential tax
examinations in these various jurisdictions. Tax authorities may disagree with our intercompany
charges, cross-jurisdictional transfer pricing or other tax positions and assess additional
taxes. We regularly assess the likely outcomes of these examinations in order to determine the
appropriateness of our tax provision. However, there can be no assurance that we will accurately
predict the outcomes of these potential examinations, and the amounts ultimately paid upon
resolution of examinations could be materially different from the amounts previously included in
our income tax expense and therefore could have a material impact on our tax provision, net
income and cash flows. In addition, our future effective tax rate could be adversely affected by
changes to our operating structure, loss of our Malaysian tax holiday, changes in the mix of
earnings in countries with tax holidays or differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new
information in the course of our tax return preparation process. In addition, President Obamas
administration has recently announced proposals for new U.S. tax legislation that, if adopted,
could adversely affect our tax rate. Any of these changes could affect our results of
operations.
Our credit agreements contain covenant restrictions that may limit our ability to operate our
business.
We may be unable to respond to changes in business and economic conditions, engage in
transactions that might otherwise be beneficial to us, and obtain additional financing, if
needed, because our revolving credit agreement with JPMorgan Chase and our Malaysian facility
agreement contain, and any of our other future debt agreements may contain, covenant
restrictions that limit our ability to, among other things:
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incur additional debt, assume obligations in connection with letters of credit, or issue
guarantees; |
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create liens; |
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enter into certain transactions with our affiliates; |
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sell certain assets; and |
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declare or pay dividends, make other distributions to stockholders or make other restricted payments. |
Under our revolving credit facility with JPMorgan Chase and our Malaysian facility
agreement, we are also subject to certain financial condition covenants. Our ability to comply
with covenants under our credit agreements is dependent on our future performance, which will be
subject to many factors, some of which are beyond our control, including prevailing economic
conditions. In addition, our failure to comply with these covenants could result in a default
under these agreements and any of our other future debt agreements, which could permit the
holders thereof to accelerate such debt. If any of our debt is accelerated, we may in the future
not have sufficient funds available to repay such debt, which could materially and negatively
affect our financial condition and results of operation.
33
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
As of February 12, 2010, our principal properties consisted of the following:
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Number of |
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Production |
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Nature |
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Lines |
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Location |
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Held |
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Major Encumbrances |
Manufacturing Plant
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3 |
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Perrysburg, Ohio,
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State of |
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United States
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Own
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Ohio Loan(1) |
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Manufacturing Plant
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4 |
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Frankfurt/Oder, Germany
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Own
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None |
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Manufacturing Plants
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16 |
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Kulim, Kedah, Malaysia
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Lease Land/ |
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Own Buildings
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n/a |
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Corporate Headquarters
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n/a |
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Tempe, Arizona, |
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United States
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Lease
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n/a |
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Administrative Office
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n/a |
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Oakland, California, |
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United States
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Lease
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n/a |
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Administrative Office
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n/a |
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Bridgewater, New Jersey, |
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United States
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Lease
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n/a |
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Administrative Office
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n/a |
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New York, New York, |
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United States
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Lease
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n/a |
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Administrative Office
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n/a |
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Mainz, Germany
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Lease
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n/a |
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See Note 13. Debt to our consolidated financial statements for additional information. |
In addition, we lease office space in several other U.S. and international locations.
As of February 12, 2010, all of our manufacturing plants are at full productive capacity
and operate 24 hours a day, seven days a week. In the first quarter of 2010, we expect to
complete the addition of one production line to our Perrysburg, Ohio manufacturing facility,
after which time our 24 production lines will have an annual global manufacturing capacity of
1.3GW, assuming the fourth quarter of 2009 average per line run rate. We can increase annual
production by increasing current factory throughput and expanding or adding new factories. On
July 23, 2009, we announced a venture to build Frances largest solar panel manufacturing plant.
The plant will have an initial annual capacity of more than 100MWp and is projected to be at
full production by the first quarter of 2012. On December 16, 2009, we announced plans to invest
$365.0 million to add eight production lines at our manufacturing center in Kulim, Malaysia,
starting production in the first half of 2011. These expansions, once completed will increase
our manufacturing capacity to 34 production lines, or 1.8GW of annual capacity at the fourth
quarter of 2009 average per line run rate at our existing plants.
Item 3: Legal Proceedings
General
In the ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims, including, but not limited to, routine employment matters. Although
we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims
asserted against us, we do not believe that any currently pending legal proceeding to which we
are a party will have a material adverse effect on our business, results of operations, cash
flows or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
None.
34
PART II
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Item 5: |
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
Price Range of Common Stock
Our common stock has been listed on The NASDAQ Global Select Market under the symbol FSLR
since November 17, 2006. Prior to this time, there was no public market for our common stock.
The following table sets forth the range of high and low sales prices per share as reported on
The NASDAQ Global Select Market for the periods indicated.
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High |
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Low |
Fiscal Year 2009 |
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First Quarter |
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$ |
165.20 |
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$ |
100.90 |
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Second Quarter |
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207.51 |
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129.78 |
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Third Quarter |
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176.05 |
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112.09 |
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Fourth Quarter |
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162.20 |
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115.09 |
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Fiscal Year 2008 |
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First Quarter |
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$ |
273.73 |
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$ |
143.31 |
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Second Quarter |
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317.00 |
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225.82 |
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Third Quarter |
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301.30 |
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186.82 |
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Fourth Quarter |
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202.93 |
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85.28 |
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The closing sales price of our common stock on The NASDAQ Global Select Market was $115.10
per share on February 12, 2010. As of February 12, 2010 there were 60 record holders of our
common stock. This figure does not reflect the beneficial ownership of shares held in nominee
names.
Dividend Policy
We have never paid, and it is our present intention for the foreseeable future not to pay,
dividends on our common stock. Our revolving credit facility imposes restrictions on our ability
to declare or pay dividends. The declaration and payment of dividends is subject to the
discretion of our board of directors and depends on various factors, including the continued
applicability of the above-referenced restrictions under our revolving credit facility, our net
income, financial condition, cash requirements, future prospects and other factors deemed
relevant by our board of directors.
35
Equity Compensation Plans
The following table sets forth certain information, as of December 26, 2009, concerning
securities authorized for issuance under all equity compensation plans of our company:
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Number of Securities |
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Remaining Available |
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Number of Securities |
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for Future Issuance |
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to be Issued |
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Weighted-Average |
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Under Equity |
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|
|
Upon Exercise of |
|
|
Exercise Price of |
|
|
Compensation |
|
|
|
Outstanding Options |
|
|
Outstanding Options |
|
|
Plans (Excluding Securities |
|
Plan Category |
|
and Rights(a)(1) |
|
|
and Rights(b)(2) |
|
|
Reflected in Column(a))(c) |
|
Equity compensation plans
approved by our
stockholders(3) |
|
|
2,104,939 |
|
|
$ |
60.63 |
|
|
|
4,705,302 |
|
Equity compensation plans not
approved by our
stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,104,939 |
|
|
$ |
60.63 |
|
|
|
4,705,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 1,126,238 shares issuable upon vesting of RSUs granted under the 2006 Omnibus
Incentive Compensation Plan. The remaining balance consists of outstanding stock option grants. |
|
(2) |
|
The weighted average exercise price does not take into account the shares issuable upon
vesting of outstanding RSUs, which have no exercise price. |
|
(3) |
|
Includes our 2003 Unit Option Plan and 2006 Omnibus Incentive Compensation Plan. |
36
Stock Price Performance Graph
The following graph compares the cumulative 37-month total return on our common stock with
the cumulative total returns of the S&P 500 Index and a peer group consisting of six comparable
issuers: SunPower Corporation, Suntech Power Holdings Co., Ltd., Trina Solar Ltd., Yingli Green
Energy Hold. Co. Ltd., SolarWorld AG and Q-Cells AG. We believe that a peer group consisting of
comparable issuers is more representative of the solar industry as a whole, and we will therefore
discontinue comparison against the NASDAQ Clean Edge Green Energy U.S. Index in future filings
(formerly known as the NASDAQ Clean Edge U.S. Liquid Series Index). Also, in light of our
addition to the S&P 500 Index during 2009, our exclusive comparative broad market index will be
the S&P 500 Index, and we will therefore discontinue comparison against the Russell 2000 Index in
future filings. In the stock price performance graph included below, an investment of $100 (with
reinvestment of all dividends) is assumed to have been made in our common stock and in each index
on November 17, 2006 and its relative performance is tracked through December 26, 2009. No cash
dividends have been declared on shares of our common stock. This performance graph is not
soliciting material, is not deemed filed with the SEC and is not to be incorporated by
reference in any filing by us under the Securities Act of 1933, as amended (the Securities
Act), or the Exchange Act, whether made before or after the date hereof and irrespective of any
general incorporation language in any such filing. The stock price performance shown on the graph
represents past performance and should not be considered an indication of future price
performance.
COMPARISON OF 37 MONTH CUMULATIVE TOTAL RETURN*
Among First Solar, Inc., S&P 500 Index,
Russell 2000 Index, NASDAQ Clean Edge Green Energy U.S. Index
and a Peer Group
|
|
|
* |
|
$100 invested on 11/17/06 in stock or 10/31/06 in index, including reinvestment of dividends.
Fiscal year ending December 26, 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/06 |
|
|
12/06 |
|
|
3/07 |
|
|
6/07 |
|
|
9/07 |
|
|
12/07 |
|
|
3/08 |
|
|
6/08 |
|
|
9/08 |
|
|
12/08 |
|
|
3/09 |
|
|
6/09 |
|
|
9/09 |
|
|
12/09 |
|
|
First Solar, Inc. |
|
|
|
100.00 |
|
|
|
|
120.61 |
|
|
|
|
210.23 |
|
|
|
|
360.91 |
|
|
|
|
475.91 |
|
|
|
|
1079.79 |
|
|
|
|
934.28 |
|
|
|
|
1102.75 |
|
|
|
|
763.58 |
|
|
|
|
545.72 |
|
|
|
|
536.38 |
|
|
|
|
655.30 |
|
|
|
|
617.87 |
|
|
|
|
540.82 |
|
|
|
S&P 500 |
|
|
|
100.00 |
|
|
|
|
101.40 |
|
|
|
|
102.05 |
|
|
|
|
108.46 |
|
|
|
|
110.66 |
|
|
|
|
106.97 |
|
|
|
|
96.87 |
|
|
|
|
94.23 |
|
|
|
|
86.34 |
|
|
|
|
67.40 |
|
|
|
|
59.97 |
|
|
|
|
69.53 |
|
|
|
|
80.38 |
|
|
|
|
85.23 |
|
|
|
Russell 2000 |
|
|
|
100.00 |
|
|
|
|
100.33 |
|
|
|
|
102.29 |
|
|
|
|
106.80 |
|
|
|
|
103.50 |
|
|
|
|
98.76 |
|
|
|
|
88.99 |
|
|
|
|
89.51 |
|
|
|
|
88.51 |
|
|
|
|
65.39 |
|
|
|
|
55.62 |
|
|
|
|
67.12 |
|
|
|
|
80.06 |
|
|
|
|
83.16 |
|
|
|
NASDAQ Clean Edge Green Energy |
|
|
|
100.00 |
|
|
|
|
96.90 |
|
|
|
|
114.68 |
|
|
|
|
132.73 |
|
|
|
|
149.31 |
|
|
|
|
180.39 |
|
|
|
|
139.71 |
|
|
|
|
154.07 |
|
|
|
|
113.28 |
|
|
|
|
70.75 |
|
|
|
|
67.77 |
|
|
|
|
85.64 |
|
|
|
|
91.69 |
|
|
|
|
94.33 |
|
|
|
Peer Group |
|
|
|
100.00 |
|
|
|
|
116.03 |
|
|
|
|
142.79 |
|
|
|
|
172.08 |
|
|
|
|
212.03 |
|
|
|
|
337.73 |
|
|
|
|
191.78 |
|
|
|
|
185.18 |
|
|
|
|
161.13 |
|
|
|
|
61.63 |
|
|
|
|
59.43 |
|
|
|
|
83.75 |
|
|
|
|
74.93 |
|
|
|
|
79.33 |
|
|
|
The stock price performance included in this graph is not necessarily indicative of future
stock price performance.
37
Recent Sales of Unregistered Securities
As previously reported in a Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 9, 2009, on April 3, 2009, we completed the acquisition of the solar
power project development business (the Project Business) of OptiSolar Inc., a Delaware
corporation (OptiSolar). Pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated
as of March 2, 2009 by and among First Solar, First Solar Acquisition Corp., a Delaware
corporation (Merger Sub), OptiSolar and OptiSolar Holdings LLC, a Delaware limited liability
company (OptiSolar Holdings), Merger Sub merged with and into OptiSolar, with OptiSolar surviving
as a wholly-owned subsidiary of First Solar (the Merger). Pursuant to the Merger, all the
outstanding shares of common stock of OptiSolar held by OptiSolar Holdings were exchanged for the
Merger Shares. The Merger Shares consisted of 2,972,420 shares of First Solar common stock, par
value $0.001 per share, including (i) 732,789 shares that have been issued and deposited with an
escrow agent to support certain indemnification obligations of OptiSolar Holdings, and (ii)
355,096 shares that were issuable upon satisfaction of conditions relating to the satisfaction of
certain then existing liabilities of OptiSolar (the Holdback Shares). The Merger Shares and
certain Holdback Shares were issued, and any remaining Holdback Shares will be issued in a
private placement exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. First Solar has prepared and filed with the Securities and Exchange Commission
a registration statement under the Securities Act covering the resale of 2,801,435 of the Merger
Shares.
As of December 26, 2009, 333,932 Holdback Shares had been issued to OptiSolar Holdings and
a total of 2,951,256 Merger Shares had been issued. The period during which claims for
indemnification from the escrow fund may be initiated commenced on April 3, 2009, and will end
on April 3, 2011.
Purchases of Equity Securities by the Issuer and Affiliate Purchases
None.
38
Item 6: Selected Consolidated Financial Data
The following table sets forth our selected consolidated financial data for the periods and at
the dates indicated.
The selected consolidated financial information for the fiscal years ended December 26,
2009, December 27, 2008, and December 29, 2007 have been derived from the audited consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. The selected
consolidated financial data for the fiscal years ended December 30, 2006 and December 31, 2005
have been derived from audited consolidated financial statements not included in this Annual
Report on Form 10-K. The information presented below should be read in conjunction with Item 7:
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and the related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
Dec 26, |
|
|
Dec 27, |
|
|
Dec 29, |
|
|
Dec 30, |
|
|
Dec 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except per share amounts) |
|
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,066,200 |
|
|
$ |
1,246,301 |
|
|
$ |
503,976 |
|
|
$ |
134,974 |
|
|
$ |
48,063 |
|
Cost of sales |
|
|
1,021,618 |
|
|
|
567,908 |
|
|
|
252,573 |
|
|
|
80,730 |
|
|
|
31,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,044,582 |
|
|
|
678,393 |
|
|
|
251,403 |
|
|
|
54,244 |
|
|
|
16,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
78,161 |
|
|
|
33,517 |
|
|
|
15,107 |
|
|
|
6,361 |
|
|
|
2,372 |
|
Selling, general and administrative |
|
|
272,898 |
|
|
|
174,039 |
|
|
|
82,248 |
|
|
|
33,348 |
|
|
|
15,825 |
|
Production start-up |
|
|
13,908 |
|
|
|
32,498 |
|
|
|
16,867 |
|
|
|
11,725 |
|
|
|
3,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
679,615 |
|
|
|
438,339 |
|
|
|
137,181 |
|
|
|
2,810 |
|
|
|
(4,790 |
) |
Foreign currency gain (loss) |
|
|
5,207 |
|
|
|
5,722 |
|
|
|
1,881 |
|
|
|
5,544 |
|
|
|
(1,715 |
) |
Interest income |
|
|
9,735 |
|
|
|
21,158 |
|
|
|
20,413 |
|
|
|
2,648 |
|
|
|
316 |
|
Interest expense, net |
|
|
(5,258 |
) |
|
|
(509 |
) |
|
|
(2,294 |
) |
|
|
(1,023 |
) |
|
|
(418 |
) |
Other expense, net |
|
|
(2,985 |
) |
|
|
(934 |
) |
|
|
(1,219 |
) |
|
|
(799 |
) |
|
|
56 |
|
Income tax expense (benefit) |
|
|
46,176 |
|
|
|
115,446 |
|
|
|
(2,392 |
) |
|
|
5,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of
change in accounting principle |
|
|
640,138 |
|
|
|
348,330 |
|
|
|
158,354 |
|
|
|
3,974 |
|
|
|
(6,551 |
) |
Cumulative effect of change in accounting
for share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
640,138 |
|
|
$ |
348,330 |
|
|
$ |
158,354 |
|
|
$ |
3,974 |
|
|
$ |
(6,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
7.67 |
|
|
$ |
4.34 |
|
|
$ |
2.12 |
|
|
$ |
0.07 |
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
83,500 |
|
|
|
80,178 |
|
|
|
74,701 |
|
|
|
56,310 |
|
|
|
48,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
$ |
7.53 |
|
|
$ |
4.24 |
|
|
$ |
2.03 |
|
|
$ |
0.07 |
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
85,044 |
|
|
|
82,124 |
|
|
|
77,971 |
|
|
|
58,255 |
|
|
|
48,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
Dec 26, |
|
Dec 27, |
|
Dec 29, |
|
Dec 30, |
|
Dec 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands) |
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
$ |
675,193 |
|
|
$ |
463,067 |
|
|
$ |
205,951 |
|
|
$ |
(576 |
) |
|
$ |
5,040 |
|
Net cash used in investing activities |
|
|
(701,690 |
) |
|
|
(308,441 |
) |
|
|
(547,250 |
) |
|
|
(159,994 |
) |
|
|
(43,832 |
) |
Net cash (used in) provided by financing
activities |
|
|
(22,021 |
) |
|
|
177,549 |
|
|
|
430,421 |
|
|
|
451,550 |
|
|
|
51,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
Dec 26, |
|
Dec 27, |
|
Dec 29, |
|
Dec 30, |
|
Dec 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
664,499 |
|
|
$ |
716,218 |
|
|
$ |
404,264 |
|
|
$ |
308,092 |
|
|
$ |
16,721 |
|
Marketable securities, current and
noncurrent |
|
|
449,844 |
|
|
|
105,601 |
|
|
|
265,399 |
|
|
|
323 |
|
|
|
312 |
|
Accounts receivable, net |
|
|
226,826 |
|
|
|
61,703 |
|
|
|
18,165 |
|
|
|
27,123 |
|
|
|
882 |
|
Inventories, current and noncurrent |
|
|
174,516 |
|
|
|
121,554 |
|
|
|
40,204 |
|
|
|
16,510 |
|
|
|
6,917 |
|
Property, plant and equipment, net |
|
|
988,782 |
|
|
|
842,622 |
|
|
|
430,104 |
|
|
|
178,868 |
|
|
|
73,778 |
|
Project assets, current and noncurrent |
|
|
132,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, current and
noncurrent |
|
|
152,194 |
|
|
|
71,247 |
|
|
|
55,701 |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
3,349,512 |
|
|
|
2,114,502 |
|
|
|
1,371,312 |
|
|
|
578,510 |
|
|
|
101,884 |
|
Long-term debt |
|
|
174,958 |
|
|
|
198,470 |
|
|
|
108,165 |
|
|
|
80,697 |
|
|
|
48,723 |
|
Accrued collection and recycling
liabilities |
|
|
92,799 |
|
|
|
35,238 |
|
|
|
13,079 |
|
|
|
3,724 |
|
|
|
917 |
|
Total liabilities |
|
|
696,725 |
|
|
|
601,460 |
|
|
|
274,045 |
|
|
|
116,844 |
|
|
|
63,490 |
|
Total stockholders equity |
|
|
2,652,787 |
|
|
|
1,513,042 |
|
|
|
1,097,267 |
|
|
|
411,440 |
|
|
|
13,129 |
|
Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and the related notes
included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated
financial information, the following discussion and analysis contains forward-looking statements
that involve risks, uncertainties, and assumptions as described under the Note Regarding
Forward-Looking Statements, that appears earlier in this Annual Report on Form 10-K. Our actual
results could differ materially from those anticipated by these forward-looking statements as a
result of many factors, including those discussed under Item 1A: Risk Factors and elsewhere in
this Annual Report on Form 10-K.
Overview
We manufacture and sell solar modules with an advanced thin film semiconductor technology,
and we design, construct and sell photovoltaic (PV) solar power systems.
In furtherance of our goal of delivering the lowest cost of solar energy and achieving
price parity with conventional fossil-fuel based peak electricity generation, we are continually
focused on reducing PV system costs in three primary areas: module manufacturing, Balance of
System (BoS) costs (consisting of costs of components of a solar power system other than the
solar modules, including inverters, mounting hardware, grid interconnection equipment, wiring
and other devices, and installation labor costs), and cost of capital. First, with respect to
our
40
module manufacturing costs, our advanced technology has allowed us to reduce our average module
manufacturing costs to the lowest in the world, based on publicly available information. In
2009, our total average manufacturing costs were $0.87 per watt, which we believe is
significantly less than those of traditional crystalline silicon solar module manufacturers. By
continuing to improve conversion efficiency and line throughput, lower material cost and drive
volume scale to further decrease overhead costs, we believe that we can further reduce our
manufacturing costs per watt and maintain our cost advantage over traditional crystalline
silicon solar module manufacturers. Second, by continuing to improve conversion efficiency,
leverage volume procurement around standardized hardware platforms, and accelerate installation
time, we believe we can continue to make substantial reductions in BoS costs, which represent
over half of all costs associated with a typical utility-scale PV solar power system. Finally,
we believe that continuing to strengthen our financial position, including our balance sheet and
credit profile, will enable us to continue to lower the cost of capital associated with our
solar power systems, thereby further enhancing the economic viability of our projects and
lowering the cost of electricity generated by solar power systems, which incorporate our modules
and technology.
We believe that combining our reliable, low cost module manufacturing capability with our
systems business enables us to more rapidly reduce the price of solar electricity, to accelerate
the adoption of our technology in large scale systems and to further our mission to create
enduring value by enabling a world powered by clean, affordable solar electricity.
On February 22, 2006, we were incorporated as a Delaware corporation. Prior to that date,
we operated as a Delaware limited liability company.
Our fiscal year ends on the Saturday on or before December 31. All references to fiscal
year 2009 relate to the 52 weeks ended December 26, 2009; all references to fiscal year 2008
relate to the 52 weeks ended December 27, 2008; and all references to fiscal year 2007 relate to
the 52 weeks ended December 29, 2007. We use a 13 week fiscal quarter.
Manufacturing Capacity
As of December 26, 2009, we operated 23 production lines with an annual global
manufacturing capacity of approximately 1228MW (based on the fourth quarter of 2009 average per
line run rate at our existing plants) at our manufacturing plants in Perrysburg, Ohio,
Frankfurt/Oder, Germany and Kulim, Malaysia. We expect to add an additional production line to
our Perrysburg, Ohio manufacturing facility in 2010, resulting in a 53.4MW increase in
manufacturing capacity (based on the fourth quarter of 2009 average per line run rate at our
existing plants). We expect to increase our manufacturing capacity to 34 production lines by
2012, with an annual global manufacturing capacity of approximately 1.8GW (based on the fourth
quarter of 2009 average per line run rate at our existing plants).
Market Overview
We project the global market for PV solar modules to have a 35% compound annual growth rate
through 2012, increasing demand to approximately 12GW worldwide. We expect approximately 7.5GW
of global demand in 2010. In addressing a growing global need for PV solar electricity, we
target markets with varying approaches depending on the underlying economics, market
requirements and distribution channels. In subsidized feed-in tariff markets, such as Germany,
we have historically sold most of solar modules to solar project developers, system integrators
and independent power producers. In other markets, such as the United States, the demand for
solar has been primarily driven by renewable portfolio standards requiring regulated utilities
to supply a portion of their total electricity from renewable energy sources such as solar
power. To meet the needs of these markets and enable balance of system cost reductions, we have
developed a fully integrated systems business that can provide a low-cost turn-key utility-scale
PV system solution for system owners and low cost electricity to utility end-users. By building
a fully integrated systems business, we believe we are in position to expand our business in
transitional, and eventually economically sustainable markets (in which subsidies or incentives
are minimal), that are expected to develop in areas with abundant solar resources and sizable
electricity demand, such as the United States, China, India and parts of Europe. In the
long-term, we plan on competing on an economic basis with conventional fossil fuel-based peaking
power generation.
41
In 2009, the solar industry moved from a supply driven to a demand driven environment, with
increasing competitive pressure as the photovoltaic industrys total manufacturing capacity to
produce solar modules exceeded demand for those products. We expect that the photovoltaic
industrys total manufacturing capacity to produce solar modules will continue to exceed demand
in 2010. Our customers faced significant challenges under the prevailing economic conditions,
including tight liquidity and extended cash realization cycles, weakened balance sheets,
constrained working capital, a volatile pricing environment leading to deferred project equity
investments, constrained project finance outside of Germany and capital preservation within U.S.
utilities during the year. We extended our payment terms with certain customers from 10 days to
45 days from the date of invoice and reduced prices under our Long-Term Contracts in response to
the economic conditions.
During the second half of 2009, German installation activity was stronger than in the first
half of 2009, driven by a combination of anticipation of reduced 2010 German feed-in tariffs,
seasonal demand, customer participation in our rebate program and improving project finance, tax
equity and corporate finance conditions. The first half of 2009 in comparison had been
characterized by project and channel competition with aggressive crystalline silicon module
pricing, deferred project equity investment based on anticipation of further reductions, project
debt constraints and delays and construction financing delays.
To the extent the challenging conditions mentioned above return as seasonal strength
subsides, our results of operations could be adversely affected by declines in the selling
prices of our modules, decreases in sales volumes of our modules and/or increases in our solar
module inventories. We expect that demand for our solar modules in Germany in the first half of
2010 will increase due to the uncertainty around the German subsidies. The German feed-in
tariffs are currently under review by the government and certain proposals under discussion
would further reduce these tariffs in the second quarter and later dates in 2010.
In 2009, we continued to expand into certain key transition markets, such as the United
States, within which affordable solar electricity solutions could be developed and ultimately
evolve into economically sustainable markets. Our acquisition of the project development
business of OptiSolar Inc. in April 2009 furthered our development of solar electricity
solutions for utility companies in the United States that are seeking cost-effective renewable
energy solutions for the purpose of meeting renewable portfolio standard requirements. In
January 2010, we completed the acquisition of certain assets from Edison Mission Groups solar
project development pipeline consisting of utility-scale solar projects located primarily on
private land in California and the southwestern United States.
In the PV module segment, we face intense competition from manufacturers of crystalline
silicon solar modules and other types of solar modules and photovoltaic systems. Solar module
manufacturers compete with one another in several product performance attributes, including
reliability, module cost per watt and levelized cost of electricity (LCOE), meaning the net
present value of total life cycle costs of the solar power project divided by the quantity of
energy which is expected to be produced over the systems life. We are the lowest cost PV module
manufacturer in the solar industry, based on publicly available information, as evidenced by the
further reduction in our average manufacturing cost per watt from $1.23 during 2007 to $0.87
during 2009. This cost advantage is reflected in the price at which we sell our modules or fully
integrated systems and enables our systems to compete favorably in respect of their LCOE. Our
cost competitiveness is based in large part on our proprietary technology (which enables
conversion efficiency improvements and permits a continuous highly automated industrial
manufacturing process), our scale and our operational excellence. In addition, our modules use
approximately 1% of the amount of semiconductor material that is used to manufacture traditional
crystalline silicon solar modules. The cost of polysilicon is a significant driver of the
manufacturing cost of crystalline silicon solar modules. The current spot market price of
polysilicon of approximately between $55 and $63 per kilogram (Kg) enables us to remain one of
the lowest cost module manufacturers in the solar industry. However, the timing and rate of
decrease in the cost of silicon feedstock could lead to pricing pressure for solar modules.
Although we are not a crystalline silicon module manufacturer, we estimate based on industry
research and public disclosures of our competitors, that a $10 per Kg increase or decrease in
the price of polysilicon could increase or decrease, respectively, our competitors
manufacturing cost per watt by approximately $0.07. Given the lower conversion efficiency of our
modules compared to crystalline silicon modules, there are higher balance-of-system costs
associated with systems using our modules. Thus, to compete effectively on the basis of LCOE our
modules need to maintain a certain cost advantage per watt compared to crystalline silicon based
modules. Our cost reduction roadmap anticipates manufacturing cost
42
per watt reductions for our modules of 10% per year. During the twelve months ended December 26,
2009, we reduced our manufacturing cost per watt by 19% from our cost per watt in the fourth
quarter of fiscal 2008.
While our modules currently enjoy competitive advantages in these product performance
attributes, there can be no guarantee that these advantages will continue to exist in the future
to the same extent or at all. Any declines in the competitiveness of our products could result
in margin compression, a decline in average selling prices of our solar modules, erosion in our
market share for modules, a decrease in the rate of revenue growth and/or a decline in overall
revenues. We have taken, and continue to take, several actions to mitigate the potential impact
resulting from competitive pressures, including adjusting our pricing policies as necessary in
core markets to drive module volumes, continuously making progress along our cost reduction
roadmap and focusing our research and development on increasing the conversion efficiency of our
solar modules.
As we expand our systems business into transition and sustainable markets, we can offer
value beyond the PV module, reduce our exposure to module-only competition and provide
comprehensive utility-scale photovoltaic systems solutions that significantly reduce solar
electricity costs. Thus, our systems business allows us to play a more active role than many of
our competitors in managing the demand for, and manufacturing throughput of our solar modules.
Finally, we seek to form and develop strong partner relationships with our customers and continue
to develop our range of offerings, including EPC capabilities and operating and maintenance
services, in order to enhance the competitiveness of systems using our solar modules.
Financial Operations Overview
The following describes certain line items in our statement of operations and some of the
factors that affect our operating results.
Net Sales
Components Business
Currently, the majority of our net sales is generated from the sale of solar modules. We
currently price and sell our solar modules per watt of power. As a result, our net sales can
fluctuate based on our output of sellable watts or price. During 2009, we sold almost all of our
solar modules to solar power system project developers, system integrators and operators
headquartered in Germany, France, Spain and Italy, which either resell our solar modules to
end-users or integrate them into power plants that they own or operate or sell.
As of December 26, 2009, we had Long-Term Supply Contracts for the sale of solar modules
expiring at the end of 2012 with fourteen European solar power system project developers and
system integrators. We also have an agreement expiring in 2013 with a solar power system project
developer and system integrator in the United States, which is a related party. These contracts
account for a significant portion of our planned production over the period from 2010 through
2012, and therefore, will significantly affect our overall financial performance. We have the
right to terminate certain Long-Term Supply Contracts upon 12 months notice and the payment of a
termination fee if we determine that certain material adverse changes have occurred. In
addition, 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 delinquent revenue. If we do not meet our annual minimum volume shipments, our
customers also have the right to terminate these contracts on a prospective basis.
Certain of our Long-Term Supply Contracts require us to deliver solar modules that, in
total, meet or exceed specified minimum average number of watts per module for the year or
specify an annual decline in the sales price per watt under these contracts. As a result, our
profitability could decline if we are unable to reduce our manufacturing cost per watt by at
least the same rate as the contractual sales prices decrease. Because the sales prices under our
Long-Term Supply Contracts are fixed and have the built-in decline each year, we cannot pass
along any increases in manufacturing costs to these customers. Although we believe that our
total manufacturing
43
costs per watt will decline at the same rate or more rapidly than our prices under the Long-Term
Supply Contracts, our failure to achieve our manufacturing cost per watt targets could result in
a reduction of our gross profit.
Our sales prices under the Long-Term Supply Contracts are denominated in euro, exposing us
to risks from currency exchange rate fluctuations. During the year ended December 26, 2009, 86%
of our sales were denominated in euro and subject to fluctuation in the exchange rate between
the euro and U.S. dollar.
We have in the past amended pricing and other terms in our Long-Term Supply Contracts in
order to remain competitive, as described below, and we may decide in the future to further
amend these contracts in order to address the highly competitive environment. For example,
during the three months ended March 28, 2009, we amended our Long-Term Supply Contracts with
certain customers to further reduce the sales price per watt under these contracts in 2009 and
2010 in exchange for increases in the volume of solar modules to be delivered under the
contracts. We also extended the payment terms for certain customers under these contracts from
net 10 days to net 45 days to increase liquidity in our sales channel and to reflect longer
module shipment times from our manufacturing plants in Malaysia.
During the third quarter of 2009, we amended our Long-Term Supply Contracts with certain of
our customers to implement a program which provides a price rebate to certain of these customers
for solar modules purchased from us. The intent of this program is to enable our customers to
successfully compete in our core segments in Germany. The rebate program applies a specified
rebate rate to solar modules sold for solar power projects in Germany at the beginning of each
quarter for the upcoming quarter. The rebate program is subject to periodic review, and we will
adjust the rebate rate quarterly upward or downward as appropriate. The rebate period commenced
during the third quarter of 2009 and terminates at the end of the fourth quarter of 2010.
Customers need to meet certain requirements in order to be eligible for and benefit from this
program.
We account for rebates as a reduction to the selling price of our solar modules and
therefore as a reduction in revenue. No rebates granted under this program can be claimed in
cash, and all rebates will be applied to reduce outstanding accounts receivable balances. During
the year ended December 26, 2009, we extended rebates to customers in the amount of 87.1
million ($128.9 million at an average exchange rate of $1.48/1.00).
We also enter into one-time module sale agreements with customers for specific projects.
Under our customer contracts we transfer title and risk of loss to the customer and
recognize revenue upon shipment. Our customers do not have extended payment terms or rights of
return under these contracts.
During 2009, principal customers of our components business were Blitzstrom GmbH, EDF EN
Development, Gehrlicher Solar AG, Juwi Solar GmbH, and Phoenix Solar AG. During 2009, each of
these five customers individually accounted for between 10% and 19% of our component segments
net sales. All of our other customers individually accounted for less than 10% of our component
business net sales during the year ended December 26, 2009.
Systems Business
Through our fully integrated systems business we provide a complete solar power system
solution, which includes project development, EPC services, O&M services and, when required,
project finance.
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Net sales from our systems segment are comprised of the following types of transactions:
|
|
|
Transaction |
|
Description |
Engineer and Procure (EP) Contract
|
|
Design of a solar electricity generation system for a
customer that uses our solar modules; includes the
procurement of all other required balance of system
(BOS) components from third party suppliers. |
|
|
|
Engineer, Procure and Construct (EPC) Contract
|
|
Design and construction for a customer of a turnkey
solar electricity generation system that uses our
solar modules; includes the procurement of all other
BOS components from third party suppliers. |
|
|
|
Sale of Project Assets
|
|
Sale of project assets to a customer at various
stages of development. This generally includes a
single project consisting of costs incurred for
permits, land or land rights or power off-take
agreements. |
|
|
|
Operating and Maintenance (O&M) Agreement
|
|
Typically a fixed-priced long-term services agreement. |
During the year ended December 26, 2009, net sales from our systems business resulted
primarily from the sale of two utility scale solar power systems in the fourth fiscal quarter to
utilities in the United States and Canada. Our systems business does not currently meet the
quantitative criteria for disclosures as a separate reporting segment. On April 3, 2009, we
completed the acquisition of the solar power project development business of OptiSolar Inc. and
we have integrated this business into our systems business.
Net sales from our systems segment are impacted by numerous factors, including the
magnitude and effectiveness of renewable portfolio standards, economic incentives (such as
European feed-in tariffs or the federal investment tax credit in the United States) and other PV
system demand drivers.
For a given solar power project, we recognize revenue for our systems business either after
execution of an EPC agreement with a third party, specifying the terms and conditions of the
construction of the solar power plant; by applying the provisions for real estate accounting; by
applying the percentage-of-completion method of accounting; or upon the sale of the complete
system solution, as appropriate for the particular facts and circumstances related to the
project and its sale.
At any given point in time, aggregate contracted sales amounts with respect to the systems
segment generally consist of the uncompleted portion of contracted projects where we have
entered into a definitive EPC agreement with the customer.
Cost of sales
Components Business
Our cost of sales includes the cost of raw materials and components for manufacturing solar
modules, such as tempered back glass, transparent conductive oxide coated front glass, cadmium
telluride, laminate, connector assemblies, laminate edge seal, and other items. Our cost of
sales also includes direct labor for the manufacturing of solar modules and manufacturing
overhead such as engineering expense, equipment maintenance, environmental health and safety
expenses, quality and production control and procurement. Cost of sales also includes
depreciation of manufacturing plants and equipment and facility-related expenses. In addition,
we accrue warranty and solar module 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 solar module 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 collect the solar modules from the installation site at the end of their useful
life and transport them to a processing center where the solar module materials and components
will be either refurbished and resold as used solar modules or recycled to recover some of the
raw materials. In return, the owner agrees not to dispose of the solar modules except through
our module collection and recycling program or any other program that we might approve of. The
owner is also responsible for
45
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 fair value of the
estimated future module collection and recycling obligation. We subsequently record accretion
expense on this future obligation, which we classify within 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 production
line, continued geographic expansion into lower-cost manufacturing regions and more efficient
absorption of fixed costs driven by economies of scale.
Systems Business
Within our systems business, project-related costs include standard EPC costs (consisting
primarily of balance of system costs for inverters, electrical and mounting hardware, project
management and engineering costs, and installation labor costs), site specific costs, and
development costs (including transmission upgrade costs, interconnection fees and permitting
costs). As further described in Note 22. Segment Reporting, at the time when the revenue
recognition criteria are met, we include the sale of our solar modules manufactured by our
components business and used by our systems business as net sales of our components business.
Therefore, the related cost of sales will also be included within our components business.
Deferred project costs represent capitalized costs related to the deferred revenue for
project development or project construction activities sold to a third party typically under an
EPC agreement, for which the revenue recognition criteria have not been met. We recognize these
costs as we recognize the revenue for these projects. Deferred project costs at December 26,
2009 and December 27, 2008 were $36.7 million and $0.7 million, respectively.
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. Gross profit is also subject to competitive pressures, and we have in the past and
may in the future decide to amend our Long-Term Supply Contracts, which specify our sales price
per watt. Other factors impacting gross profits are the ramp of production on new plants due to a
reduced ability to absorb fixed costs until full production volumes are reached, the mix of net
sales generated by our components and systems businesses coupled with a geographic factor. Gross
profit margin is affected by our systems business, which generally operates at a lower gross
profit margin due to the pass-through nature of certain balance of system components procured
from third parties. Gross profit for our systems business excludes cost of sales for solar
modules, that are included in the gross profit of our components business.
Research and development
Research and development expense consists primarily of salaries and personnel-related costs
and the cost of products, materials and outside services used in our process and product
research and development activities. We acquire equipment for general use in further process
developments and record the depreciation of this equipment as research and development expense.
We maintain a number of programs and activities to improve our technology and processes in
order to enhance the performance and reduce the costs of our solar modules and PV systems using
our modules. We maintain active collaborations with the National Renewable Energy Laboratory (a
division of the United States Department of Energy), Brookhaven National Laboratory and several
universities. We report our research and development expense net of grant funding. We received
$0.9 million and $1.8 million of grant funding during the years ended December 27, 2008 and
December 29, 2007, respectively, that we applied towards our research and development programs.
We did not receive any grant funding during the year ended December 26, 2009. We expect our
research and development expense to increase in absolute terms in the future as we increase
personnel and research and development activity. Over time, we expect research and development
expense to decline as a percentage of net sales and on a cost per watt basis as a result of
economies of scale.
46
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other
personnel-related costs, professional fees, insurance costs, travel expense and other selling
expenses. We expect these expenses to increase in the near term, both in absolute dollars and as
a percentage of net sales, in order to support the growth of our business as we expand our sales
and marketing efforts, improve our information processes and systems and implement the financial
reporting, compliance and other infrastructure required for an expanding public company. Over
time, we expect selling, general and administrative expense to decline as a percentage of net
sales and on a cost per watt basis as our net sales and our total watts produced increase.
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 the year ended December 29, 2007 in connection with the qualification of
our German plant and the planning and preparation of our plants at our Malaysian manufacturing
center. We incurred production start-up expense of $32.5 million during the year ended December
27, 2008 in connection with the planning and preparation of our plants at the Malaysian
manufacturing center. Production start-up expense for the year ended December 26, 2009 was $13.9
million and related to plant four of our Malaysian manufacturing center and our Ohio plant
expansion. In general, we expect production start-up expense per production line to be higher
when we build an entirely new manufacturing facility compared with the addition of new
production lines at an existing manufacturing facility, primarily due to the additional
infrastructure investment required when building an entirely new facility. Over time, we expect
production start-up expense to decline as a percentage of net sales and on a cost per watt basis
as a result of economies of scale.
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 our functional
currencies.
Interest income
Interest income is earned on our cash, cash equivalents, marketable securities and
restricted cash and investments.
Interest expense, net
Interest expense, net of amounts capitalized, is incurred on various debt financings.
Income Tax Expense
Income taxes are imposed on our income by the taxing authorities in the various
jurisdictions in which we operate, principally the United States, Germany and Malaysia. The
statutory federal tax rate in the United States is 35% while the tax rate in Germany and
Malaysia is approximately 28.5% and 25%, respectively. In Malaysia we have been granted a
long-term tax holiday, pursuant to which substantially all our income earned in Malaysia is
exempt from income tax.
Critical Accounting Estimates
In preparing our financial statements in conformity with generally accepted accounting
principles in the United States (GAAP), we make estimates and assumptions about future events
that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the
disclosure of contingent liabilities in our financial statements and the related notes thereto.
Some of our accounting policies require the application of significant
47
judgment by management in the selection of appropriate assumptions for making these estimates.
By their nature, these judgments are subject to an inherent degree of uncertainty. We base our
judgments and estimates on our historical experience, on our forecasts and on other available
information, as appropriate. Our significant accounting policies are described in Note 2.
Summary of Significant Accounting Policies to our consolidated financial statements for the
year ended December 26, 2009 included elsewhere in this Annual Report on Form 10-K.
Our critical accounting estimates, which require the most significant management estimates
and judgment in determining amounts reported in our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K, are as follows:
Solar module collection and recycling. At the time of sale, we recognize an expense for the
estimated fair value of our future obligation for collecting and recycling the solar modules that
we have sold when they have reached the end of their useful lives. We base our estimate of the
fair value of our collection and recycling obligations on the present value of the expected
future cost of collecting and recycling the solar modules, which includes the cost of packaging
the solar modules for transport, the cost of freight from the solar modules installation sites
to a recycling center, the material, labor and capital costs of the recycling process and an
estimated third-party profit margin and return on risk for collection and recycling services. We
base this estimate on our experience collecting and recycling our solar modules and on our
expectations about future developments in recycling technologies and processes, about economic
conditions at the time the solar modules will be collected and recycled and about the timing of
solar modules returns for recycling. In the periods between the time of our sales and our
settlement of the collection and recycling obligations, we accrete the carrying amount of the
associated liability by applying the discount rate used for its initial measurement. At December
26, 2009, our estimate of the fair value of our liability for collecting and recycling solar
modules was $92.8 million. A 10% decrease in our estimate of the future cost of collecting and
recycling a solar module would reduce this estimated liability by $9.0 million, to $83.8 million;
a 10% increase in our estimate of the future cost of collecting and recycling a solar module
would increase this estimated liability by $9.1 million, to $101.9 million.
Product warranties. We provide a limited warranty for defects in materials and workmanship
under normal use and service conditions for five years following delivery to the owner of our
solar modules. We also warrant to the owner of our solar modules that solar modules installed in
accordance with agreed-upon specifications will produce at least 90% of their initial power
output rating during the first 10 years following their installation and at least 80% of their
initial power output rating during the following 15 years. Our warranties are automatically
transferred from the original purchaser of our solar modules to a subsequent purchaser. We
accrue warranty costs when we recognize sales, using amounts estimated based on our historical
experience with warranty claims, our monitoring of field installation sites and in-house
testing.
Accounting for Income Taxes. We are subject to the income tax laws of the United States, its
states and municipalities and those of the foreign jurisdictions in which we have significant
business operations. These tax laws are complex and subject to different interpretations by the
taxpayer and the relevant governmental taxing authorities. We must make judgments and
interpretations about the application of these inherently complex tax laws when determining our
provision for income taxes and must also make estimates about when in the future certain items
affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax
laws may be settled with the taxing authority upon examination or audit. We regularly assess the
likelihood of assessments in each of the taxing jurisdictions resulting from current and
subsequent years examinations, and we record tax liabilities as appropriate.
We establish liabilities for potential additional taxes that may arise out of tax audits in
accordance with ASC 740, Income Taxes. Once established, we adjust the liabilities when
additional information becomes available or when an event occurs requiring an adjustment.
Significant judgment is required in making these estimates, and the actual cost of a legal
claim, tax assessment or regulatory fine or penalty may ultimately be materially different from
our recorded liabilities, if any.
In preparing our consolidated financial statements, we calculate our income tax expense
based on our interpretation of the tax laws in the various jurisdictions where we conduct
business. This requires us to estimate our current tax obligations and the realizability of
uncertain tax positions and to assess temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. These temporary differences
48
result in deferred tax assets and liabilities, the net current amount of which we show as a
component of current assets or current liabilities and the net noncurrent amount of which we
show as other assets or other liabilities on our consolidated balance sheet.
We must also assess the likelihood that each of our deferred tax assets will be realized.
To the extent we believe that realization of any of our deferred tax assets is not more likely
than not, we establish a valuation allowance. When we establish a valuation allowance or
increase this allowance in a reporting period, we generally record a corresponding tax expense
in our consolidated statement of operations. Conversely, to the extent circumstances indicate
that a valuation allowance is no longer necessary, that portion of the valuation allowance is
reversed, which generally reduces our overall income tax expense.
We also consider the earnings of our foreign subsidiaries and determine whether such
amounts are indefinitely reinvested outside the United States. We have concluded that all such
accumulated earnings are currently indefinitely reinvested. Accordingly, no additional taxes
have been accrued that might be incurred if such amounts were repatriated to the United States.
If our intention to permanently reinvest the earnings of our foreign subsidiaries changes,
additional taxes may be required to be accrued. See Note 18. Income Taxes to our consolidated
financial statements for additional information.
Goodwill. Goodwill represents the excess of the purchase price of acquired companies over
the estimated fair value assigned to the identifiable assets acquired and liabilities assumed. We
do not amortize goodwill, but instead test goodwill for impairment at least annually in the
fourth quarter and, if necessary, we would record any impairment in accordance with ASC 350,
Intangibles - Goodwill and Other. We will perform an impairment review between scheduled annual
tests if facts and circumstances indicate that it is more likely than not that the fair value of
a reporting unit that has goodwill is less than its carrying value. In the process of our annual
impairment review, we primarily use the income approach of valuation, which includes the
discounted cash flow method, and the market approach of valuation, which considers values of
comparable businesses, to determine the fair value of our goodwill. Significant management
judgment is required in the forecasts of future operating results and the discount rates that we
used in the discounted cash flow method of valuation and in the selection of comparable
businesses that we used in the market approach.
We reported $286.5 million of goodwill at December 26, 2009, which represents the excess of
the purchase price over the fair value of the identifiable net tangible and intangible assets
that we acquired from Turner Renewable Energy, LLC and OptiSolar Inc. In accordance with ASC
350, Intangibles Goodwill and Other, we performed our annual test of our goodwill for
impairment in the fourth quarter of the year ended December 26, 2009 and concluded that it was
not impaired. Testing goodwill for impairment involves two steps. The first step is comparing
the fair value of a reporting unit containing goodwill to its carrying value. If the fair value
of the reporting unit is less than its carrying value, impairment is indicated and step two of
the test must be performed. That step involves determining the implied fair value of the
reporting units goodwill by allocating the fair value of the reporting unit to the fair values
of its identifiable assets and liabilities. Any excess of the fair value of the reporting unit
over the net fair values of its identifiable assets and liabilities is attributed to goodwill,
and any amount by which the carrying value of goodwill exceeds this implied fair value is
written off as an impairment loss. The fair value of our goodwill substantially exceeded the
carrying value and therefore we concluded that there was no indication that our goodwill was
impaired and that performing step two of the goodwill impairment test was not applicable.
49
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of
net sales for the years ended December 26, 2009, December 27, 2008 and December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
December 26, |
|
December 27, |
|
December 29, |
|
|
2009 |
|
2008 |
|
2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
49.4 |
% |
|
|
45.6 |
% |
|
|
50.1 |
% |
Gross profit |
|
|
50.6 |
% |
|
|
54.4 |
% |
|
|
49.9 |
% |
Research and development |
|
|
3.8 |
% |
|
|
2.7 |
% |
|
|
3.0 |
% |
Selling, general and administrative |
|
|
13.2 |
% |
|
|
14.0 |
% |
|
|
16.4 |
% |
Production start-up |
|
|
0.7 |
% |
|
|
2.6 |
% |
|
|
3.3 |
% |
Operating income |
|
|
32.9 |
% |
|
|
35.1 |
% |
|
|
27.2 |
% |
Foreign currency gain |
|
|
0.3 |
% |
|
|
0.5 |
% |
|
|
0.4 |
% |
Interest income |
|
|
0.5 |
% |
|
|
1.7 |
% |
|
|
4.1 |
% |
Interest expense, net |
|
|
(0.3 |
)% |
|
|
0.0 |
% |
|
|
(0.5 |
)% |
Other expense, net |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
(0.3 |
)% |
Income tax expense (benefit) |
|
|
2.2 |
% |
|
|
9.3 |
% |
|
|
(0.5 |
)% |
Net income |
|
|
31.1 |
% |
|
|
27.9 |
% |
|
|
31.4 |
% |
Fiscal Years Ended December 26, 2009 and December 27, 2008
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Net sales |
|
$ |
2,066,200 |
|
|
$ |
1,246,301 |
|
|
$ |
819,899 |
|
|
|
66 |
% |
The increase in our net sales was primarily driven by price elasticity that resulted in
strong demand for our solar modules as prices declined, resulting in a 114% increase in the MW
volume of solar modules sold during 2009 compared with 2008, and from an increase in business
activity associated with our systems segment business, partially offset by a decrease in our
module average selling price. Revenue recognized for our systems business during 2009 was $115.0
million and resulted primarily from the sale of two utility scale solar power systems to
utilities in the United States and Canada. The increase in MW volume of solar modules sold is
attributable to the full production ramp of all four plants at our Malaysian manufacturing
center, continued improvements to our manufacturing process and the growth in our systems
business. In addition, we increased the average conversion efficiency by approximately 3% during
2009 compared with 2008. Our average selling price decreased by approximately 25% during 2009
compared with 2008. Approximately 20% of the decline in our average selling price was primarily
due to competitive pressure, including the commencement of a customer rebate program in the third
quarter of 2009. Additionally, our average selling price was adversely impacted by approximately
4% due to a decrease in the foreign exchange rate between the U.S. dollar and the euro and by
approximately 1% due to a shift in customer mix. During 2009 and 2008, 65% and 74%, respectively,
of our net sales resulted from sales of solar modules to customers headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Cost of sales |
|
$ |
1,021,618 |
|
|
$ |
567,908 |
|
|
$ |
453,710 |
|
|
|
80 |
% |
% of net sales |
|
|
49.4 |
% |
|
|
45.6 |
% |
|
|
|
|
|
|
|
|
50
The increase in our cost of sales was due to higher production and sales volumes, which
resulted from the commencement of production at all of our four plants at our Malaysian
manufacturing center, production ramp of our Perrysburg, Ohio expansion, and an increase in
business activity associated with our systems segment business. The increased production and
sales volumes in our components business and increased volume sold through our systems business
had the following effects: a $278.7 million increase in direct material expense (including an
$8.2 million amortization of project assets acquired through our OptiSolar acquisition), a $41.0
million increase in warranty expense and accruals for the estimated future costs associated with
the collection and recycling of our solar modules due to increased sales, a $13.8 million
increase in sales freight and other costs, and a $120.2 million increase in manufacturing
overhead costs. The increase in manufacturing overhead costs was due to a $35.3 million increase
in salaries and personnel related expenses (including a $4.9 million increase in share-based
compensation expense), a $32.9 million increase in facility and related expenses and a $52.0
million increase in depreciation expense. Each of these manufacturing overhead cost increases
primarily resulted from increased infrastructure associated with the build out of our Malaysian
manufacturing center and start-up of our systems business. Our average manufacturing cost per
watt declined by $0.21 per watt, or 19%, from $1.08 in 2008 to $0.87 in 2009 and included $0.01
of ramp penalty associated with the ramp and qualification of our Malaysian and Perrysburg
manufacturing facilities and $0.01 of non-cash stock based compensation.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Gross profit |
|
$ |
1,044,582 |
|
|
$ |
678,393 |
|
|
$ |
366,189 |
|
|
|
54 |
% |
% of net sales |
|
|
50.6 |
% |
|
|
54.4 |
% |
|
|
|
|
|
|
|
|
Gross profit as a percentage of net sales decreased by 3.8% percentage points in 2009
compared with 2008 due to a decline in our average selling prices by approximately 21%,
partially offset by continued manufacturing cost per watt reduction of 19.4%. The decline in the
exchange rate between the U.S. dollar and the euro adversely impacted our gross profit by 2.2%.
We expect that gross profit will be impacted in future periods by the volatility of the exchange
rate between the U.S. dollar and the euro and product mix between our components and systems
businesses.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Research and development |
|
$ |
78,161 |
|
|
$ |
33,517 |
|
|
$ |
44,644 |
|
|
|
133 |
% |
% of net sales |
|
|
3.8 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
The increase in our research and development expense was due to a $14.2 million increase in
personnel related expense (including a $2.3 million increase in share-based compensation
expense) resulting from increased headcount. In addition, testing and qualification material
costs increased by $18.0 million, consulting and other expenses increased by $11.5 million and
grants received decreased by $0.9 million during 2009 compared with 2008. During fiscal 2009, we
continued the development of solar modules with increased efficiencies at converting sunlight
into electricity and we increased the conversion efficiency of our modules by approximately 3%
in comparison to fiscal 2008.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Selling, general and administrative |
|
$ |
272,898 |
|
|
$ |
174,039 |
|
|
$ |
98,859 |
|
|
|
57 |
% |
% of net sales |
|
|
13.2 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
51
The increase in selling, general and administrative expense was due to a $66.0 million
increase in salaries and personnel-related expenses (including a $23.0 million increase in
share-based compensation expense, of which, $15.7 million were one-time charges associated with
our executive management team). In addition, legal and professional service fees increased by
$13.3 million; and other expenses increased by $19.6 million and included $6.9 million of
one-time charges, of which, $5.5 million of costs related to the acquisition, integration and
operation of the solar power project development business of OptiSolar, which we acquired on
April 3, 2009.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Production start-up |
|
$ |
13,908 |
|
|
$ |
32,498 |
|
|
$ |
(18,590 |
) |
|
|
(57 |
)% |
% of net sales |
|
|
0.7 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
During 2009, we incurred $13.9 million of production start-up expenses for our Malaysian
and Perrysburg manufacturing expansions, including legal, regulatory and personnel costs,
compared with $32.5 million of production start-up expenses for our Malaysian manufacturing
expansion during 2008. Production start-up expenses are comprised of the cost of labor and
material and depreciation expense to run and qualify the production lines, related facility
expenses, management of our replication process and legal and regulatory costs.
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Foreign currency gain |
|
$ |
5,207 |
|
|
$ |
5,722 |
|
|
$ |
(515 |
) |
|
|
(9 |
)% |
Foreign currency gain decreased primarily due to a decrease in our net foreign currency
denominated assets and liabilities.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Interest income |
|
$ |
9,735 |
|
|
$ |
21,158 |
|
|
$ |
(11,423 |
) |
|
|
(54 |
)% |
Interest income decreased primarily due to a substantial decline in interest rates.
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Interest expense, net |
|
$ |
5,258 |
|
|
$ |
509 |
|
|
$ |
4,749 |
|
|
|
933 |
% |
Interest expense, net of amounts capitalized, increased primarily due to lower amounts of
interest expense capitalized during 2009. In addition, interest expense, net for 2009 includes a
$2.4 million expense related to the termination of the interest rate swaps for our German debt
facility. We fully repaid this facility on June 30, 2009.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Other expense, net |
|
$ |
2,985 |
|
|
$ |
934 |
|
|
$ |
2,051 |
|
|
|
220 |
% |
52
Other expense, net, increased primarily due to expenses associated with our credit default
swaps, which expired in the second quarter of 2009.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2009 |
|
2008 |
|
Year Change |
|
|
(Dollars in thousands) |
Income tax expense |
|
$ |
46,176 |
|
|
$ |
115,446 |
|
|
$ |
(69,270 |
) |
|
|
(60 |
)% |
Effective tax rate |
|
|
6.7 |
% |
|
|
24.9 |
% |
|
|
|
|
|
|
|
|
Income tax expense decreased primarily due to the effect of our tax holiday in Malaysia.
During 2009, a significant amount of our pre-tax income was generated in Malaysia where we have
a 16.5 year tax holiday. In addition, we recognized an $11.5 million tax benefit during 2009
related to the reversal of 2008 Malaysian tax due to the pull-forward of the tax holiday to
2008, which was granted in 2009. See also Note 18. Income Taxes to our condensed consolidated
financial statements for more information.
Fiscal Years Ended December 27, 2008 and December 29, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Net sales |
|
$ |
1,246,301 |
|
|
$ |
503,976 |
|
|
$ |
742,325 |
|
|
|
147 |
% |
The increase in our net sales was due primarily to a 148% increase in the MW volume of
solar modules sold during 2008 compared with 2007 due to strong demand for our solar modules in
Europe. The increase in MW volume of solar modules sold was attributable to the full production
ramp of our German plant, commencement of product shipments at the first two plants at our
Malaysian manufacturing center and continued improvements to our manufacturing process. In
addition, we increased the average number of sellable watts per solar module by approximately 4%
during 2008 compared with 2007. Our average selling price decreased by approximately 1% during
2008 compared with 2007, mainly due to a 6.5% contractual price decline, partially offset by a
6% increase related to a favorable foreign exchange rate between the U.S. dollar and the euro.
Approximately 74% of our net sales during 2008 resulted from sales of solar modules to customers
headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Cost of sales |
|
$ |
567,908 |
|
|
$ |
252,573 |
|
|
$ |
315,335 |
|
|
|
125 |
% |
% of net sales |
|
|
45.6 |
% |
|
|
50.1 |
% |
|
|
|
|
|
|
|
|
The increase in our cost of sales was due to higher production and sales volumes, which
resulted from the full production ramp of our German facility and commencement of production at
our first three plants at our Malaysian manufacturing center. These factors caused a $191.1
million increase in direct material expense, a $13.8 million increase in warranty and accruals
for the estimated future costs associated with the collection and recycling of our solar
modules, a $9.4 million increase in sales freight and other costs and a $101.0 million increase
in manufacturing overhead costs. The increase in manufacturing overhead costs was due to a $40.5
million increase in salaries and personnel related expenses, including a $2.4 million increase
in share-based compensation expense, a $30.7 million increase in facility and related expenses
and a $29.8 million increase in depreciation expense, in each case primarily resulting from
increased infrastructure associated with our German and Malaysian expansions.
53
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Gross profit |
|
$ |
678,393 |
|
|
$ |
251,403 |
|
|
$ |
426,990 |
|
|
|
170 |
% |
% of net sales |
|
|
54.4 |
% |
|
|
49.9 |
% |
|
|
|
|
|
|
|
|
As a percentage of sales, gross profit increased 4.5 percentage points from 2007 to 2008,
representing increased leverage of our fixed cost infrastructure and scalability associated with
our German and Malaysian expansions, which drove a 148% increase in the number of megawatts
sold. Our average manufacturing cost per watt decreased by 9% during 2008, while our average
selling prices decreased by 1%. During 2008, foreign currency gains due to a favorable exchange
rate between the U.S. dollar and the euro and increased leverage of our fixed cost
infrastructure contributed approximately 1.9% and 5.6%, respectively, to our gross profit,
partially offset by a 3.0% decline in our average selling prices.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Research and development |
|
$ |
33,517 |
|
|
$ |
15,107 |
|
|
$ |
18,410 |
|
|
|
122 |
% |
% of net sales |
|
|
2.7 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
The increase in our research and development expense was due to a $13.7 million increase in
personnel related expense (including a $1.2 million increase in share-based compensation
expense) due to increased headcount and additional share-based compensation awards. In addition,
consulting and other expenses increased by $3.8 million and grant revenue increased by $0.9
million during 2008 compared with 2007.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Selling, general and administrative |
|
$ |
174,039 |
|
|
$ |
82,248 |
|
|
$ |
91,791 |
|
|
|
112 |
% |
% of net sales |
|
|
14.0 |
% |
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
The increase in selling, general and administrative expense was due to a $62.0 million
increase in salaries and personnel-related expenses (including a $15.5 million increase in
share-based compensation). In addition, legal and professional service fees increased by $13.0
million and other expenses increased by $16.8 million during 2008. The increase resulted
primarily from the expansion of our solar power system and project development business as well
as operating a global manufacturing business.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Production start-up |
|
$ |
32,498 |
|
|
$ |
16,867 |
|
|
$ |
15,631 |
|
|
|
93 |
% |
% of net sales |
|
|
2.6 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
During 2008, we incurred $32.5 million of production start-up expenses for our Ohio and
Malaysian manufacturing expansion, including legal, regulatory and personnel costs, compared
with $16.9 million of production start-up expenses for our German and Malaysian plant expansions
during 2007. Production start-up expenses are primarily the cost of labor and material and
depreciation expense to run and qualify the production lines, related facility expenses,
management of our replication process and legal and regulatory costs.
54
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Foreign currency gain |
|
$ |
5,722 |
|
|
$ |
1,881 |
|
|
$ |
3,841 |
|
|
|
204 |
% |
Foreign exchange gain increased by $3.8 million during 2008 due to a substantial increase
in our foreign currency denominated assets and liabilities and the high volatility of the U.S.
dollar relative to other currencies, in particular the euro.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Interest income |
|
$ |
21,158 |
|
|
$ |
20,413 |
|
|
$ |
745 |
|
|
|
4 |
% |
Interest income remained relatively flat primarily as a result of higher cash, cash
equivalents and marketable securities balances during 2008, offset by a decline in interest
rates.
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Interest expense, net |
|
$ |
509 |
|
|
$ |
2,294 |
|
|
$ |
(1,785 |
) |
|
|
(78 |
)% |
Interest expense, net of amounts capitalized, decreased primarily as a result of higher
amounts of interest expense capitalized due to the construction of our Malaysian manufacturing
center.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Other expense, net |
|
$ |
934 |
|
|
$ |
1,219 |
|
|
$ |
(285 |
) |
|
|
(23 |
)% |
Other expense, net consisted mainly of financing fees related to our credit facilities.
During 2008, other expense was reduced by a mark-to-market gain of $0.6 million associated with
our credit default swap.
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Year Over |
|
|
2008 |
|
2007 |
|
Year Change |
|
|
(Dollars in thousands) |
Income tax expense (benefit) |
|
$ |
115,446 |
|
|
$ |
(2,392 |
) |
|
$ |
117,838 |
|
|
|
N.M. |
|
Effective tax rate |
|
|
24.9 |
% |
|
|
(1.5 |
)% |
|
|
|
|
|
|
|
|
Income tax expense increased by $117.8 million, primarily due to the increase in pre-tax
income of $307.8 million, as well as the reversal of a valuation allowance in 2007 of $54.9
million.
Our Malaysian subsidiary has been granted a tax holiday for a period of 16.5 years, which
was originally scheduled to commence on January 1, 2009, which generally provides for a 100%
exemption from Malaysian income tax. Subsequent to year end, we received formal approval
granting our request to pull forward this previously approved tax holiday by one year. Due to
the fact that this approval was granted subsequent to the end of 2008, we concluded that the
financial impact should be reflected in our 2009 financial results.
55
Liquidity and Capital Resources
As of December 26, 2009, we had $1,114.3 million in cash, cash equivalents and marketable
securities, compared with $821.8 million as of December 27, 2008. We believe that our current
cash, cash equivalents, marketable securities, cash flows from operating activities and our
revolving credit facility will be sufficient to meet our working capital and capital expenditure
needs for at least the next 12 months. However, if our financial results or operating plans
change from our current assumptions, we may not have sufficient resources to support our business
plan.
Our expanding systems business is expected to have increasing liquidity requirements in the
future. Solar power project development cycles, which span the time between the identification of
land and the commercial operation of a photovoltaic power plant project, vary substantially and
can take many months or years to mature. As a result of these long project cycles, we may need to
make significant up front investments of resources in advance of the signing of power purchase
agreements and EPC contracts and the receipt of any revenue. We have historically financed these
up front investments primarily using working capital and cash on hand. In the future, we may also
engage in one or more debt or equity financings. Such financings could result in increased
expenses or dilution to our existing stockholders. If we are unable to obtain debt or equity
financing on reasonable terms, we may be unable to execute our expansion strategy.
The unprecedented disruption in the credit markets over the past two years has had a
significant adverse impact on a number of financial institutions. As of December 26, 2009, our
liquidity and investments have not been materially adversely impacted by the 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.
Cash Flows
The following table summarizes the key cash flow metrics for the years ended December 26,
2009, December 27, 2008 and December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
675,193 |
|
|
$ |
463,067 |
|
|
$ |
205,951 |
|
Net cash used in investing activities |
|
|
(701,690 |
) |
|
|
(308,441 |
) |
|
|
(547,250 |
) |
Net cash (used in) provided by financing activities |
|
|
(22,021 |
) |
|
|
177,549 |
|
|
|
430,421 |
|
Effect of exchange rates on cash flows |
|
|
(3,201 |
) |
|
|
(20,221 |
) |
|
|
7,050 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(51,719 |
) |
|
$ |
311,954 |
|
|
$ |
96,172 |
|
|
|
|
|
|
|
|
|
|
|
Operating activities
Cash provided by operating activities was $675.2 million during 2009 compared with $463.1
million during 2008. Net cash provided by operating activities during 2009 resulted primarily
from an increase in net income and the impact of non-cash items that were recorded on our
statements of operations, primarily depreciation and amortization expense and stock-based
compensation expense, offset by an increase in operating assets, primarily accounts receivable
and deferred project costs.
Cash received from customers increased to $1,957.6 million during 2009 compared with
$1,203.8 million during 2008, primarily due to an increase in net sales, offset by an increase in
accounts receivable of $122.2 million. The increase in accounts receivable was primarily due to
the amendment of certain of our customers Long-Term Supply Contracts to extend their payment
terms from net 10 days to net 45 days primarily to increase liquidity in our sales channel and to
reflect longer module shipment times from our manufacturing plants in Malaysia and due to
additional volume shipped during 2009. Our net sales increased from $1,246.3 million during 2008
to $2,066.2 million during 2009.
Cash paid to suppliers and associates increased to $1,123.7 million during 2009 from $723.1
million during 2008, mainly due to an increase in raw material and component purchases, an
increase in personnel-related costs due to higher headcount and other costs supporting our
growth. Inventory increased by $52.1 million, of which
56
$32.2 million related to an increase in finished goods inventory as a result of inventory
requirements for utility scale projects in North America.
Income taxes paid, net of refunds during 2009, were $147.8 million compared to $2.0 million
during 2008.
Cash provided by operating activities was $463.1 million during 2008 compared with $206.0
million during 2007. Net cash provided by operating activities during 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 our statements of operations, primarily
depreciation and amortization expense and stock-based compensation expense, offset by increases
in accounts receivable and inventories to support growth. Our inventories increased by $84.8
million during 2008 compared with 2007 primarily due to an increase in raw materials and work in
process as a result of revenue growth.
Cash received from customers increased to $1,203.8 million during 2008 from $516.0 million
during 2007 primarily due to an increase in net sales. Our net sales increased from $504.0
million during 2007 to $1,246.3 million in 2008. This increase was partially offset by cash paid
to suppliers and associates of $723.1 million during 2008 compared with cash paid to suppliers
and associates of $276.5 million during 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 $701.7 million during 2009 compared with $308.4
million during 2008. Cash used in investing activities during 2009 resulted primarily from the
net purchase of marketable securities of $342.5 million, the net investment in notes receivable
of $74.2 million to fund construction of various photovoltaic power generation facilities,
capital expenditures of $279.9 million, and an increase of $4.2 million in restricted
investments to fund our solar module collection and recycling program. Capital expenditures
during 2009 related primarily to the expansion of our plant in Perrysburg, Ohio and completion
of construction of our new plants in Malaysia. See Note 11. Notes Receivable to our
consolidated financial statements for more information regarding the above-referenced notes
receivable.
On April 3, 2009, we completed the acquisition of the solar power project development
business of OptiSolar Inc. The total consideration consisted of 2,972,420 shares of our common
stock, of which 355,096 shares represented a contingent consideration. The total purchase price
based on the closing price of our common stock on April 3, 2009 of $134.38 per share was $399.4
million. See also Note 3. Acquisitions to our consolidated financial statements.
We expect to spend up to $550.0 million in capital expenditures for 2010, including
expenditures related to the eight-line expansion of our manufacturing facility in Malaysia. A
majority of our capital expenditures for 2010 will be incurred in foreign currency; and
therefore, are subject to fluctuations in currency exchange rates.
At the beginning of each fiscal year we pre-fund our estimated solar module collection and
recycling costs for solar modules that we sold during the prior fiscal year through a custodial
account with a large bank as investment advisor, in the name of a trust, for which First Solar,
Inc., First Solar Malaysia Sdn. Bhd, and First Solar Manufacturing GmbH are grantors. For this
purpose we assume a minimum service life of 25 years for our solar modules. Prior to June 2009,
we pre-funded our estimated solar module collection and recycling costs through a financial
services company. At December 26, 2009, we had $36.5 million in the new custodial account, which
we classified in our restricted investments on our balance sheet. See Note 6. Restricted Cash
and Investments to our consolidated financial statements for additional information
Cash used in investing activities was $308.4 million during 2008 compared with $547.3
million during 2007. Cash used in investing activities during 2008 was primarily due to capital
expenditures of $459.3 million related to the construction of our plants in Malaysia and
Germany, an investment of $25.0 million in the preferred stock of a United States company that
supplies solar power systems to commercial and residential customers and an increase in our
restricted investments of $15.6 million to fund our solar module collection and recycling
program, offset by the net sale of marketable securities of $191.4 million.
57
On November 30, 2007, we completed the acquisition of Turner Renewable Energy, LLC, a
privately held company which designed and deployed commercial solar power systems in the United
States. The total consideration for the transaction was $34.3 million (excluding exit and
transaction costs of $0.7 million); consisting of $28.0 million in common stock and $6.3 million
in cash. See also Note 3. Acquisitions to our consolidated financial statements.
Financing activities
Cash used in financing activities was $22.0 million during 2009 compared with cash provided
by financing activities of $177.5 million during 2008. Cash used in financing activities during
2009 resulted primarily from the repayment of long-term debt of $78.2 million, which was
partially offset by (i) proceeds of $44.7 million from the issuance of debt, net of issuance
cost, related to the equipment export financing agreement for our Malaysian manufacturing
center, (ii) proceeds from the issuance of common stock of $6.0 million during 2009 mainly due
to the exercise of employee stock options and, (iii) excess tax benefits from share-based
compensation arrangements of $4.9 million.
Cash provided by financing activities was $177.5 million during 2008 compared with $430.4
million during 2007. Cash provided by financing activities during 2008 resulted primarily from
an increase in investment incentives related to the construction of our plant in Frankfurt/Oder,
Germany of $35.7 million and proceeds from the issuance of debt, net of issuance cost, of $138.9
million related to the equipment export facility agreement for our Malaysian manufacturing
center. See Note 13. Debt to our consolidated financial statements for more information about
these credit facilities. This increase was partially offset by the repayment of long-term debt
of $41.7 million in 2008. Excess tax benefits from share-based compensation arrangements during
2008 were $28.7 million.
Proceeds from the issuance of common stock during 2007 were $376.1 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 $10.2 million of proceeds received from the exercise of employee
stock options.
Contractual Obligations
The following table presents our contractual obligations as of December 26, 2009, which
consists of legal commitments requiring us to make fixed or determinable cash payments,
regardless of contractual requirements with the vendor to provide future goods or services. We
purchase raw materials for inventory, services and manufacturing equipment from a variety of
vendors. During the normal course of business, in order to manage manufacturing lead times and
help assure adequate supply, we enter into agreements with suppliers that either allow us to
procure goods and services when we choose or that establish purchase requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year |
|
|
|
|
|
|
|
Less Than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
(In thousands) |
|
Long-term debt obligations(1) |
|
$ |
196,388 |
|
|
$ |
35,895 |
|
|
$ |
65,995 |
|
|
$ |
62,586 |
|
|
$ |
31,912 |
|
Capital lease obligations |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
72,183 |
|
|
|
8,392 |
|
|
|
20,719 |
|
|
|
13,988 |
|
|
|
29,084 |
|
Purchase obligations(2) |
|
|
416,373 |
|
|
|
161,106 |
|
|
|
229,469 |
|
|
|
17,518 |
|
|
|
8,280 |
|
Recycling obligations |
|
|
92,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
777,745 |
|
|
$ |
205,395 |
|
|
$ |
316,183 |
|
|
$ |
94,092 |
|
|
$ |
162,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes estimated cash interest to be paid over the remaining terms of the debt. |
|
(2) |
|
Purchase obligations are agreements to purchase goods or services that are enforceable and
legally binding on us and that specify all significant terms, including fixed or minimum
quantities to be purchased, fixed minimum, or variable price provisions and the approximate
timing of transactions. |
58
In addition to the amounts shown in the table above, we have recorded $37.2 million of
unrecognized tax benefits as liabilities in accordance with ASC 740, and we are uncertain as to
if or when such amounts may be settled.
Debt and Credit Sources
Revolving Credit Facility
On September 4, 2009, we entered into a revolving credit facility pursuant to a Credit
Agreement among First Solar, Inc., certain designated Borrowing Subsidiaries (consisting of
First Solar Manufacturing GmbH, a German subsidiary, and other subsidiaries of our Company who
may in the future be designated as borrowers pursuant to the Credit Agreement) and several
lenders. JPMorgan Chase Bank, N.A. and Bank of America served as Joint-Lead Arrangers and
Bookrunners, with JPMorgan also acting as Administrative Agent. The Credit Agreement provides us
and the borrowing subsidiaries with a senior secured three-year revolving credit facility in an
aggregate available amount of $300.0 million, a portion of which is available for letters of
credit and swingline loans. Subject to certain conditions, we have the right to request an
increase in the aggregate commitments under the facility up to $400.0 million. In connection
with the Credit Agreement, we also entered into a guarantee and collateral agreement and foreign
security agreements.
At December 26, 2009, we had no borrowings outstanding and $46.0 million in letters of
credit drawn on the revolving credit facility, leaving approximately $254.0 million in capacity
available under the revolving credit facility, $29.0 million of which may be used for letters of
credit. As of this date, based on applicable indices, the all-in effective three months LIBOR
borrowing rate under the facility was 3.47%. See also Note 13. Debt to our consolidated
financial statements.
Malaysian Facility Agreement
On May 6, 2008, in connection with the plant expansion at our Malaysian manufacturing
center, First Solar Malaysia Sdn. Bhd. (FS Malaysia), our indirect wholly owned subsidiary,
entered into an export financing facility agreement (Malaysian Facility Agreement) with a
consortium of banks. The total available loan amount was 134.0 million ($193.0 million at the
balance sheet close rate on December 26, 2009 of $1.44/1.00). Pursuant to the Malaysia Facility
Agreement, we began semi-annual repayments of the principal balances of these credit facilities
during 2008. Amounts repaid under this credit facility cannot be re-borrowed. At December 26,
2009, we had $168.3 million of borrowings outstanding, with no additional borrowing capacity
available under this credit facility. See also Note 13. Debt to our consolidated financial
statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 26, 2009.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies to our consolidated financial
statements filed with this Annual Report on Form 10-K for a summary of recent accounting
pronouncements.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
Our international operations accounted for 93% of our net sales during 2009 and 95% of our
net sales during 2008; of which, 92% and 100% of these international sales, respectively, 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. For the
year ended December 26, 2009, a 10% change in the
59
euro exchange rates would have impacted our net euro sales by $177.7 million. For our
manufacturing operations in Germany and Malaysia, many of our operating expenses for the plants
in these countries are denominated in the local currency.
Our primary foreign currency exposures are transaction exposure, cash flow exposure and
earnings translation exposure.
Transaction Exposure: Many components of our business have assets and liabilities
(primarily receivables, investments, accounts payable, debt, solar module collection and
recycling liabilities and inter-company transactions) that are denominated in currencies other
than the relevant entitys functional currency. Changes in the exchange rates between our
components functional currencies and the currencies in which these assets and liabilities are
denominated can create fluctuations in our reported consolidated financial position, results of
operations and cash flows. We may enter into foreign exchange forward contracts or other
financial instruments to hedge assets and liabilities against the short-term effects of currency
exchange rate fluctuations. The gains and losses on the foreign exchange forward contracts will
offset all or part of the transaction gains and losses that we recognize in earnings on the
related foreign currency assets and liabilities. As of December 26, 2009, the total unrealized
loss on our foreign exchange forward contracts was $6.8 million. These contracts have maturities
of less than two months.
Since our acquisition of the solar power project development business of OptiSolar on April
3, 2009, we have also become exposed to currency exchange rate fluctuations between the U.S.
dollar and Canadian dollar.
As of December 26, 2009, the total notional value of our foreign exchange forward contracts
was as follows (notional amounts and U.S. dollar equivalents in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
Close Rate on |
|
|
|
|
|
|
|
|
|
|
December 26, |
Transaction |
|
Currency |
|
Notional Amount |
|
U.S. Equivalent |
|
2009 |
Purchase |
|
Euro |
|
229.1 |
|
$ |
329.9 |
|
|
$1.44/1.00 |
Sell |
|
Euro |
|
109.9 |
|
$ |
158.3 |
|
|
$1.44/1.00 |
Sell |
|
U.S. dollar for Euro |
|
$27.2 |
|
$ |
27.2 |
|
|
n/a |
Purchase |
|
Malaysian ringgits |
|
MYR 104.5 |
|
$ |
30.3 |
|
|
$0.29/MYR1.00 |
Sell |
|
Malaysian ringgits |
|
MYR 22.8 |
|
$ |
6.6 |
|
|
$0.29/MYR1.00 |
Purchase |
|
Japanese yen |
|
JPY 275.0 |
|
$ |
2.8 |
|
|
$0.01/JPY1.00 |
Sell |
|
Japanese yen |
|
JPY 70.0 |
|
$ |
0.7 |
|
|
$0.01/JPY1.00 |
Purchase |
|
Canadian dollar |
|
CAD 108.4 |
|
$ |
103.0 |
|
|
$0.95/CAD1.00 |
Sell |
|
Canadian dollar |
|
CAD 120.1 |
|
$ |
114.1 |
|
|
$0.95/CAD1.00 |
If the U.S. dollar would have weakened by 10% against the euro, Malaysian ringgit, Canadian
dollar and Japanese yen, the favorable impact on our income before income taxes related to our
foreign exchange contracts to purchase and sell euro, Malaysian ringgit, Canadian dollars and
Japanese yen would have been $0.5 million.
Cash Flow Exposure: We expect many of the components of our business to have material
future cash flows, including revenues and expenses, which will be denominated in currencies
other than the components functional currency. Our primary cash flow exposures are future
customer collections and vendor payments. Changes in the exchange rates between our components
functional currency and the other currencies in which they transact business will cause
fluctuations in the cash flows we expect to receive when these cash flows are realized or
settled. Accordingly, we may enter into foreign exchange forward contracts to hedge the value of
a portion of these forecasted cash flows. We account for these foreign exchange contracts as
cash flow hedges. We initially report the effective portion of the derivatives gain or loss in
accumulated other comprehensive income (loss) and subsequently reclassify amounts into earnings
when the hedged transaction is realized.
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 foreign exchange
forward contracts to hedge the exchange risk on forecasted cash flows denominated in euro. As of
December 26, 2009, the unrealized loss on these contracts was $15.9 million and the total
notional value of the contracts was 361.0 million ($519.8 million at the balance
60
sheet close rate on December 26, 2009 of $1.44/1.00). The weighted average forward exchange
rate for these contracts was $1.40/1.00 at December 26, 2009.
Earnings Translation Exposure: Fluctuations in foreign currency exchange rates create
volatility in our reported results of operations because we are required to consolidate
financial statements of our foreign currency denominated subsidiaries. We may decide to purchase
forward exchange contracts or other instruments to offset this impact from currency
fluctuations. These contracts would be marked-to-market on a monthly basis and any unrealized
gain or loss would be recorded in interest and other income, net. We do not hedge translation
exposure at this time, but may do so in the future.
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 $3.2 million and $20.2 million in the years ended December 26, 2009 and December
27, 2008, respectively. Although we cannot predict the impact of future currency exchange rate
fluctuations on our business or results of operations, we believe that we will continue to have
risk associated with currency exchange rate fluctuations in the future.
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 power system. Although the useful life of a solar
electricity generation system is considered to be 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 expenditures. 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 power 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 power 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 for the financing
of our German plant, which bore interest at the Euro Interbank Offered Rate (Euribor) plus 1.6%.
We had interest rate swap contracts with a financial institution that effectively converted to
fixed rates the variable rate of Euribor on the term loan portion of this credit facility. These
swap contracts were required under the credit facility agreement which we repaid and terminated
on June 30, 2009. Therefore, we terminated these interest rate swap contracts on June 26, 2009
and consequently recognized interest expense of 1.7 million ($2.4 million at the balance sheet
close rate on December 26, 2009 of $1.44/1.00). The termination of the interest rate swap
contracts settled on June 30, 2009.
During May 2008, we entered into a euro-denominated credit facility to finance some of the
equipment cost for our Malaysian manufacturing center. The loans under the fixed-rate portion of
the credit facility bear interest on the outstanding unpaid principal balance at an annual rate
of 4.54%. The loans under the floating-rate portion of the credit facility bear interest on the
outstanding unpaid principal balance at Euribor plus a margin of 0.55%. On May 29, 2009, we
entered into an interest rate swap contract with a notional value of 57.3 million ($82.5 million
at the balance sheet close rate on December 26, 2009 of $1.44/1.00) to receive a six-month
floating interest rate, equal to Euribor, and pay a fixed rate of 2.80%. This contract became
effective on September 30, 2009. The notional amount of the interest rate swap contract is
scheduled to decline in correspondence to our scheduled principal payments on the underlying
hedged debt.
In addition, we invest 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
mutual funds, government and non-government debt securities and
61
certificates of deposit. As of December 26, 2009, our fixed-income investments earned a pre-tax
yield of 1.08%, with a weighted average maturity of 7.2 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 $4.8 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 would have a significant impact on our financial position,
results of operations or cash flows. As of December 26, 2009, all of our investments were in
money market mutual funds, federal and foreign agency debt, supranational debt, corporate debt
securities, foreign government obligations and asset backed 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 solar 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 terms, 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 subject us to credit risk. These
consist primarily of cash, cash equivalents, investments, trade accounts receivable, interest
rate swap contracts and foreign exchange forward contracts. We are exposed to credit losses in
the event of nonperformance by the counterparties to our financial and derivative instruments.
We place cash, cash equivalents, investments, interest rate swap contracts and foreign exchange
forward contracts with various high-quality financial institutions and limit the amount of
credit risk from any one counterparty. We continuously evaluate the credit standing of our
counterparty financial institutions.
62
Item 8: Financial Statements and Supplementary Data
Consolidated Financial Statements
Our consolidated financial statements as required by this item are included in Item 15:
Exhibits and Financial Statement Schedules Consolidated Financial Statements of this Annual
Report on Form 10-K. See Item 15(a) for a list of our consolidated financial statements.
Selected Quarterly Financial Data (Unaudited)
The following selected quarterly financial date should be read in conjunction with our
consolidated financial statements, the related notes and Item 7: Managements Discussion and
Analysis of Financial Condition and Results of Operations. This information has been derived
from our unaudited consolidated financial statements that, in our opinion, reflect all recurring
adjustments necessary to fairly present this information when read in conjunction with our
consolidated financial statements and the related notes appearing in the section entitled
Consolidated Financial Statements. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
Dec 26, |
|
Sep 26, |
|
Jun 27, |
|
Mar 28, |
|
Dec 27, |
|
Sep 27, |
|
Jun 28, |
|
Mar 29, |
|
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2008 |
|
2008 |
|
2008 |
|
2008 |
|
|
(In thousands, except per share amounts) |
Net sales |
|
$ |
641,265 |
|
|
$ |
480,851 |
|
|
$ |
525,876 |
|
|
$ |
418,208 |
|
|
$ |
433,651 |
|
|
$ |
348,694 |
|
|
$ |
267,041 |
|
|
$ |
196,915 |
|
Cost of sales |
|
|
375,056 |
|
|
|
235,858 |
|
|
|
227,780 |
|
|
|
182,924 |
|
|
|
199,725 |
|
|
|
153,251 |
|
|
|
122,341 |
|
|
|
92,591 |
|
Gross profit |
|
|
266,209 |
|
|
|
244,993 |
|
|
|
298,096 |
|
|
|
235,284 |
|
|
|
233,926 |
|
|
|
195,443 |
|
|
|
144,700 |
|
|
|
104,324 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
23,716 |
|
|
|
24,136 |
|
|
|
18,605 |
|
|
|
11,704 |
|
|
|
11,080 |
|
|
|
9,952 |
|
|
|
7,725 |
|
|
|
4,760 |
|
Selling, general and
administrative |
|
|
96,667 |
|
|
|
53,990 |
|
|
|
72,926 |
|
|
|
49,315 |
|
|
|
52,747 |
|
|
|
48,995 |
|
|
|
43,626 |
|
|
|
28,671 |
|
Production start-up |
|
|
1,099 |
|
|
|
4,076 |
|
|
|
2,524 |
|
|
|
6,209 |
|
|
|
8,771 |
|
|
|
6,344 |
|
|
|
4,622 |
|
|
|
12,761 |
|
Total operating expenses |
|
|
121,482 |
|
|
|
82,202 |
|
|
|
94,055 |
|
|
|
67,228 |
|
|
|
72,598 |
|
|
|
65,291 |
|
|
|
55,973 |
|
|
|
46,192 |
|
Operating income |
|
|
144,727 |
|
|
|
162,791 |
|
|
|
204,041 |
|
|
|
168,056 |
|
|
|
161,328 |
|
|
|
130,152 |
|
|
|
88,727 |
|
|
|
58,132 |
|
Foreign currency gain
(loss) |
|
|
3,020 |
|
|
|
114 |
|
|
|
239 |
|
|
|
1,834 |
|
|
|
6,190 |
|
|
|
(1,889 |
) |
|
|
647 |
|
|
|
774 |
|
Interest and other income
(loss) , net |
|
|
2,570 |
|
|
|
2,062 |
|
|
|
(2,982 |
) |
|
|
(158 |
) |
|
|
4,094 |
|
|
|
4,836 |
|
|
|
4,482 |
|
|
|
6,303 |
|
Income before income
taxes |
|
|
150,317 |
|
|
|
164,967 |
|
|
|
201,298 |
|
|
|
169,732 |
|
|
|
171,612 |
|
|
|
133,099 |
|
|
|
93,856 |
|
|
|
65,209 |
|
Income tax expense |
|
|
8,697 |
|
|
|
11,623 |
|
|
|
20,719 |
|
|
|
5,137 |
|
|
|
38,841 |
|
|
|
33,830 |
|
|
|
24,185 |
|
|
|
18,590 |
|
Net income |
|
$ |
141,620 |
|
|
$ |
153,344 |
|
|
$ |
180,579 |
|
|
$ |
164,595 |
|
|
$ |
132,771 |
|
|
$ |
99,269 |
|
|
$ |
69,671 |
|
|
$ |
46,619 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.68 |
|
|
$ |
1.82 |
|
|
$ |
2.16 |
|
|
$ |
2.01 |
|
|
$ |
1.63 |
|
|
$ |
1.23 |
|
|
$ |
0.87 |
|
|
$ |
0.59 |
|
Diluted |
|
$ |
1.65 |
|
|
$ |
1.79 |
|
|
$ |
2.11 |
|
|
$ |
1.99 |
|
|
$ |
1.61 |
|
|
$ |
1.20 |
|
|
$ |
0.85 |
|
|
$ |
0.57 |
|
Weighted-average number
of shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
84,413 |
|
|
|
84,179 |
|
|
|
83,723 |
|
|
|
81,685 |
|
|
|
81,345 |
|
|
|
80,430 |
|
|
|
79,877 |
|
|
|
79,059 |
|
Diluted |
|
|
86,004 |
|
|
|
85,892 |
|
|
|
85,668 |
|
|
|
82,612 |
|
|
|
82,450 |
|
|
|
82,436 |
|
|
|
82,004 |
|
|
|
81,607 |
|
63
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms, and
that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives
of the disclosure controls and procedures are met. Additionally, in designing disclosure
controls and procedures, our management was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any
disclosure control and procedure also is based in part upon 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.
Based on their evaluation as of the end of the period covered by this Annual Report on Form
10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective at the reasonable assurance level.
(b) Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 26, 2009 based on
the criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of America.
Based on the results of our evaluation, our management concluded that our internal control
over financial reporting was effective as of December 26, 2009.
The effectiveness of our internal control over financial reporting as of December 26, 2009
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during
the fourth quarter ended December 26, 2009 covered by this Annual Report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
(d) Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not
expect that our disclosure controls or our internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that there are
64
resource constraints, and the benefits of 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 a simple error or
mistake. Additionally, controls can 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 also is based in part upon 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 the degree of compliance with policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Item 9B: Other Information
None.
PART III
Item 10: Directors, Executive Officers and Corporate Governance
Information concerning our board of directors and audit committee will appear in our 2010
Proxy Statement, under the section entitled Directors. The information in that portion of the
Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.
For information with respect to our executive officers, see Item 1: Business Executive
Officers of the Registrant. of this Annual Report on Form 10-K.
Information concerning Section 16(a) beneficial ownership reporting compliance will appear
in our 2010 Proxy Statement under the section entitled Section 16(a) Beneficial Ownership
Reporting Compliance. The information in that portion of the Proxy Statement is incorporated in
this Annual Report on Form 10-K by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all directors,
officers and associates of First Solar. Information concerning this code will appear in our 2010
Proxy Statement under the section entitled Proposal No. 1 Election of Directors Corporate
Governance. The information in that portion of the Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference.
Item 11: Executive Compensation
Information concerning executive compensation and related information will appear in our
2010 Proxy Statement under the section entitled Executive Compensation and Related
Information. The information in that portion of the Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information concerning the security ownership of certain beneficial owners and management
and related stockholder matters, including information regarding our equity compensation plans,
will appear in our 2010 Proxy Statement under the section entitled Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters. The information in
that portion of the Proxy Statement is incorporated in this Annual Report on Form 10-K by
reference.
Item 13: Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related party transactions will appear in
our 2010 Proxy Statement under the section entitled Certain Relationships and Related Party
Transactions. The information in that portion of the Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference.
65
Item 14: Principal Accountant Fees and Services
Information concerning principal accountant fees and services and the audit committees
pre-approval policies and procedures will appear in our 2010 Proxy Statement under the section
entitled Principal Accountant Fees and Services. The information in that portion of the Proxy
Statement is incorporated in this Annual Report on Form 10-K by reference.
PART IV
Item 15: Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
|
|
|
|
(1) Consolidated Financial Statements |
|
|
|
|
|
|
69 |
|
|
Financial Statements |
|
|
|
|
|
|
70 |
|
|
|
|
71 |
|
|
|
|
72 |
|
|
|
|
73 |
|
|
|
|
74 |
|
|
(2) Financial Statement Schedule: |
|
|
|
|
|
|
67 |
|
66
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 26, 2009, December 27, 2008 and December 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Beginning |
|
|
|
|
|
|
|
|
|
at End of |
Description |
|
of Year |
|
Additions |
|
Deductions |
|
Year |
|
|
(In thousands) |
Allowance for doubtful accounts receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 29, 2007 |
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
(4 |
) |
|
$ |
5 |
|
Year ended December 27, 2008 |
|
$ |
5 |
|
|
$ |
711 |
|
|
$ |
(716 |
) |
|
$ |
|
|
Year ended December 26, 2009 |
|
$ |
|
|
|
$ |
6,990 |
|
|
$ |
(6,000 |
) |
|
$ |
990 |
|
Provision for inventory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 29, 2007 |
|
$ |
11 |
|
|
$ |
45 |
|
|
$ |
(11 |
) |
|
$ |
45 |
|
Year ended December 27, 2008 |
|
$ |
45 |
|
|
$ |
2,548 |
|
|
$ |
(1,617 |
) |
|
$ |
976 |
|
Year ended December 26, 2009 |
|
$ |
976 |
|
|
$ |
|
|
|
$ |
(976 |
) |
|
$ |
|
|
Valuation allowance against our deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 29, 2007 |
|
$ |
54,890 |
|
|
$ |
596 |
|
|
$ |
(54,890 |
) |
|
$ |
596 |
|
Year ended December 27, 2008 |
|
$ |
596 |
|
|
$ |
1,097 |
|
|
$ |
(596 |
) |
|
$ |
1,097 |
|
Year ended December 26, 2009 |
|
$ |
1,097 |
|
|
$ |
2,093 |
|
|
$ |
|
|
|
$ |
3,190 |
|
(3) Exhibits: See Item 15(b) below.
(b) Exhibits: The exhibits listed on the accompanying Index to Exhibits on this Form 10-K
are filed, or incorporated into this Form 10-K by reference.
(c) Financial Statement Schedule: See Item 15(a) above.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized on February 19, 2010.
|
|
|
|
|
|
FIRST SOLAR, INC.
|
|
|
By: |
/s/ JAMES ZHU
|
|
|
|
James Zhu |
|
|
|
Principal Accounting Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ MICHAEL J. AHEARN
Michael J. Ahearn
|
|
Executive Chairman and Chairman of the
Board of Directors
|
|
February 19, 2010 |
|
|
|
|
|
/s/ ROBERT J. GILLETTE
Robert J. Gillette
|
|
Chief Executive Officer and Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ JENS MEYERHOFF
Jens Meyerhoff
|
|
Chief Financial Officer
|
|
February 19, 2010 |
|
|
|
|
|
|
|
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 19, 2010 |
|
|
|
|
|
Additional Directors: |
|
|
|
|
|
|
|
|
|
/s/ JAMES F. NOLAN
James F. Nolan
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ J. THOMAS PRESBY
J. Thomas Presby
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ PAUL H. STEBBINS
Paul H. Stebbins
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ MICHAEL SWEENEY
Michael Sweeney
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ CRAIG KENNEDY
Craig Kennedy
|
|
Director
|
|
February 19, 2010 |
|
|
|
|
|
/s/ JOSE VILLARREAL
Jose Villarreal
|
|
Director
|
|
February 19, 2010 |
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of First Solar, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of First Solar, Inc. and
its subsidiaries at December 26, 2009 and December 27, 2008, and the results of their operations
and their cash flows for each of the three years in the period ended December 26, 2009 in
conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 26, 2009, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys
management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the Companys
internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers
LLP
Phoenix, Arizona
February 19, 2010
69
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except share |
|
|
|
data) |
|
ASSETS
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
664,499 |
|
|
$ |
716,218 |
|
Marketable securities |
|
|
120,236 |
|
|
|
76,042 |
|
Accounts receivable, net |
|
|
226,826 |
|
|
|
61,703 |
|
Inventories |
|
|
152,821 |
|
|
|
121,554 |
|
Project assets |
|
|
1,081 |
|
|
|
|
|
Deferred tax asset, net |
|
|
21,679 |
|
|
|
9,922 |
|
Prepaid expenses and other current assets |
|
|
164,129 |
|
|
|
91,962 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,351,271 |
|
|
|
1,077,401 |
|
Property, plant and equipment, net |
|
|
988,782 |
|
|
|
842,622 |
|
Project assets |
|
|
131,415 |
|
|
|
|
|
Deferred tax asset, net |
|
|
130,515 |
|
|
|
61,325 |
|
Marketable securities |
|
|
329,608 |
|
|
|
29,559 |
|
Restricted cash and investments |
|
|
36,494 |
|
|
|
30,059 |
|
Investment in related party |
|
|
25,000 |
|
|
|
25,000 |
|
Goodwill |
|
|
286,515 |
|
|
|
33,829 |
|
Inventories |
|
|
21,695 |
|
|
|
|
|
Other assets |
|
|
48,217 |
|
|
|
14,707 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,349,512 |
|
|
$ |
2,114,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
75,744 |
|
|
$ |
46,251 |
|
Income tax payable |
|
|
8,740 |
|
|
|
99,938 |
|
Accrued expenses |
|
|
186,682 |
|
|
|
140,899 |
|
Current portion of long-term debt |
|
|
28,559 |
|
|
|
34,951 |
|
Other current liabilities |
|
|
95,202 |
|
|
|
59,738 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
394,927 |
|
|
|
381,777 |
|
Accrued solar module collection and recycling liability |
|
|
92,799 |
|
|
|
35,238 |
|
Long-term debt |
|
|
146,399 |
|
|
|
163,519 |
|
Other liabilities |
|
|
62,600 |
|
|
|
20,926 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
696,725 |
|
|
|
601,460 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share; 500,000,000 shares authorized;
85,208,199 and 81,596,810 shares issued and outstanding at December 26,
2009 and December 27, 2008, respectively |
|
|
85 |
|
|
|
82 |
|
Additional paid-in capital |
|
|
1,658,091 |
|
|
|
1,176,156 |
|
Contingent consideration |
|
|
2,844 |
|
|
|
|
|
Accumulated earnings |
|
|
1,001,363 |
|
|
|
361,225 |
|
Accumulated other comprehensive loss |
|
|
(9,596 |
) |
|
|
(24,421 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,652,787 |
|
|
|
1,513,042 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,349,512 |
|
|
$ |
2,114,502 |
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 26, |
|
|
December 27, |
|
|
December 29, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except per share amounts) |
|
Net sales |
|
$ |
2,066,200 |
|
|
$ |
1,246,301 |
|
|
$ |
503,976 |
|
Cost of sales |
|
|
1,021,618 |
|
|
|
567,908 |
|
|
|
252,573 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,044,582 |
|
|
|
678,393 |
|
|
|
251,403 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
78,161 |
|
|
|
33,517 |
|
|
|
15,107 |
|
Selling, general and administrative |
|
|
272,898 |
|
|
|
174,039 |
|
|
|
82,248 |
|
Production start-up |
|
|
13,908 |
|
|
|
32,498 |
|
|
|
16,867 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
364,967 |
|
|
|
240,054 |
|
|
|
114,222 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
679,615 |
|
|
|
438,339 |
|
|
|
137,181 |
|
Foreign currency gain |
|
|
5,207 |
|
|
|
5,722 |
|
|
|
1,881 |
|
Interest income |
|
|
9,735 |
|
|
|
21,158 |
|
|
|
20,413 |
|
Interest expense, net |
|
|
(5,258 |
) |
|
|
(509 |
) |
|
|
(2,294 |
) |
Other expense, net |
|
|
(2,985 |
) |
|
|
(934 |
) |
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
686,314 |
|
|
|
463,776 |
|
|
|
155,962 |
|
Income tax expense (benefit) |
|
|
46,176 |
|
|
|
115,446 |
|
|
|
(2,392 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
640,138 |
|
|
$ |
348,330 |
|
|
$ |
158,354 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
7.67 |
|
|
$ |
4.34 |
|
|
$ |
2.12 |
|
Diluted |
|
$ |
7.53 |
|
|
$ |
4.24 |
|
|
$ |
2.03 |
|
Weighted-average number of shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
83,500 |
|
|
|
80,178 |
|
|
|
74,701 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
85,044 |
|
|
|
82,124 |
|
|
|
77,971 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated |
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Contingent |
|
|
Earnings |
|
|
Comprehensive |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Consideration |
|
|
(Deficit) |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
(In thousands) |
|
Balance, December 30, 2006 |
|
|
72,332 |
|
|
|
72 |
|
|
|
555,749 |
|
|
|
|
|
|
|
(145,403 |
) |
|
|
1,022 |
|
|
|
411,440 |
|
Components of comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,354 |
|
|
|
|
|
|
|
158,354 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,116 |
|
|
|
5,116 |
|
Unrealized loss on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,648 |
) |
|
|
(1,648 |
) |
Unrealized gain on marketable securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of the adoption of accounting for the
uncertainty in income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
Exercise of stock options, including tax benefits |
|
|
2,048 |
|
|
|
2 |
|
|
|
40,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,369 |
|
Issuance of restricted and unrestricted stock |
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition |
|
|
118 |
|
|
|
1 |
|
|
|
28,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,067 |
|
Common stock issued in secondary offering, net of
offering costs |
|
|
4,000 |
|
|
|
4 |
|
|
|
365,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
365,969 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
39,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,402 |
|
Reclassifications from employee stock options on
redeemable shares |
|
|
|
|
|
|
|
|
|
|
50,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,226 |
|
Balance, December 29, 2007 |
|
|
78,575 |
|
|
|
79 |
|
|
|
1,079,775 |
|
|
|
|
|
|
|
12,895 |
|
|
|
4,518 |
|
|
|
1,097,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348,330 |
|
|
|
|
|
|
|
348,330 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,943 |
) |
|
|
(13,943 |
) |
Unrealized loss on derivative instruments, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,230 |
) |
|
|
(15,230 |
) |
Unrealized gain on marketable securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, including tax benefits |
|
|
2,980 |
|
|
|
3 |
|
|
|
44,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,697 |
|
Issuance of restricted and unrestricted stock |
|
|
42 |
|
|
|
|
|
|
|
(7,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,040 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
58,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 27, 2008 |
|
|
81,597 |
|
|
|
82 |
|
|
|
1,176,156 |
|
|
|
|
|
|
|
361,225 |
|
|
|
(24,421 |
) |
|
|
1,513,042 |
|
Components of comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640,138 |
|
|
|
|
|
|
|
640,138 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,303 |
|
|
|
13,303 |
|
Unrealized loss on derivative instruments, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167 |
) |
|
|
(167 |
) |
Unrealized gain on marketable securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,689 |
|
|
|
1,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
654,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, including excess tax
benefits |
|
|
537 |
|
|
|
1 |
|
|
|
7,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,273 |
|
Issuance of restricted and unrestricted stock |
|
|
123 |
|
|
|
|
|
|
|
(11,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,387 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
89,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,463 |
|
Common stock issued for acquisition |
|
|
2,951 |
|
|
|
2 |
|
|
|
396,587 |
|
|
|
2,844 |
|
|
|
|
|
|
|
|
|
|
|
399,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 26, 2009 |
|
|
85,208 |
|
|
|
85 |
|
|
|
1,658,091 |
|
|
|
2,844 |
|
|
|
1,001,363 |
|
|
|
(9,596 |
) |
|
|
2,652,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 26, |
|
|
December 27, |
|
|
December 29, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from customers |
|
$ |
1,957,604 |
|
|
$ |
1,203,822 |
|
|
$ |
515,994 |
|
Cash paid to suppliers and associates |
|
|
(1,123,746 |
) |
|
|
(723,123 |
) |
|
|
(276,525 |
) |
Interest received |
|
|
6,147 |
|
|
|
19,138 |
|
|
|
19,965 |
|
Interest paid |
|
|
(10,550 |
) |
|
|
(4,629 |
) |
|
|
(2,294 |
) |
Income taxes paid, net of refunds |
|
|
(147,843 |
) |
|
|
(1,975 |
) |
|
|
(19,002 |
) |
Excess tax benefit from share-based compensation
arrangements |
|
|
(4,892 |
) |
|
|
(28,661 |
) |
|
|
(30,196 |
) |
Other operating activities |
|
|
(1,527 |
) |
|
|
(1,505 |
) |
|
|
(1,991 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
675,193 |
|
|
|
463,067 |
|
|
|
205,951 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(279,941 |
) |
|
|
(459,271 |
) |
|
|
(242,371 |
) |
Purchases of marketable securities |
|
|
(607,356 |
) |
|
|
(334,818 |
) |
|
|
(1,081,154 |
) |
Proceeds from maturities of marketable securities |
|
|
149,076 |
|
|
|
107,450 |
|
|
|
787,783 |
|
Proceeds from sales of marketable securities |
|
|
115,805 |
|
|
|
418,762 |
|
|
|
|
|
Investment in notes receivable |
|
|
(99,637 |
) |
|
|
|
|
|
|
|
|
Payments received on notes receivable |
|
|
25,447 |
|
|
|
|
|
|
|
|
|
Increase in restricted investments |
|
|
(4,150 |
) |
|
|
(15,564 |
) |
|
|
(6,008 |
) |
Investment in related party |
|
|
|
|
|
|
(25,000 |
) |
|
|
|
|
Acquisitions, net of cash acquired |
|
|
318 |
|
|
|
|
|
|
|
(5,500 |
) |
Other investing activities |
|
|
(1,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(701,690 |
) |
|
|
(308,441 |
) |
|
|
(547,250 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises |
|
|
5,961 |
|
|
|
16,036 |
|
|
|
10,173 |
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
|
365,969 |
|
Repayment of long-term debt |
|
|
(78,224 |
) |
|
|
(41,691 |
) |
|
|
(34,757 |
) |
Proceeds from issuance of debt, net of issuance costs |
|
|
44,739 |
|
|
|
138,887 |
|
|
|
49,368 |
|
Excess tax benefit from share-based compensation
arrangements |
|
|
4,892 |
|
|
|
28,661 |
|
|
|
30,196 |
|
Proceeds from economic development funding |
|
|
615 |
|
|
|
35,661 |
|
|
|
9,475 |
|
Other financing activities |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(22,021 |
) |
|
|
177,549 |
|
|
|
430,421 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,201 |
) |
|
|
(20,221 |
) |
|
|
7,050 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(51,719 |
) |
|
|
311,954 |
|
|
|
96,172 |
|
Cash and cash equivalents, beginning of the period |
|
|
716,218 |
|
|
|
404,264 |
|
|
|
308,092 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
664,499 |
|
|
$ |
716,218 |
|
|
$ |
404,264 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment acquisitions funded by
liabilities |
|
$ |
|
|
|
$ |
19,449 |
|
|
$ |
38,320 |
|
See accompanying notes to these consolidated financial statements.
73
Note 1. First Solar and Its Business
We design, manufacture and sell solar electric power modules, which we produce at our plants
in Perrysburg, Ohio, Frankfurt/Oder, Germany and Kulim, Malaysia. We also develop sites or other
solar power project sites for building solar power systems using our solar modules and provide
engineering, procurement and construction services. First Solar Holdings, LLC was formed as a
Delaware limited liability company in May 2003 to act as the holding company for First Solar, LLC
which was formed in 1999 and renamed First Solar US Manufacturing, LLC in the second quarter of
2006, and other subsidiaries formed during 2003 and later. On February 22, 2006, First Solar
Holdings, LLC was incorporated in Delaware as First Solar Holdings, Inc. and, also during the first
quarter of 2006, was renamed First Solar, Inc. Upon our change in corporate organization on
February 22, 2006, our membership units became common stock shares and our unit options became
share options on a one-for-one basis.
Note 2. Summary of Significant Accounting Policies
Basis of presentation. Certain prior period amounts have been reclassified to conform to the
current presentation. We reclassified certain segment amounts as information provided to our Chief
Operating Decision Maker has changed. Our Chief Operating Decision Maker consists of senior
executive staff. This change was primarily due to how they view our systems segment as an enabler
to drive module throughput for our components business with the objective of achieving break-even
results before income taxes for our systems segment. See also Note 22. Segment Information to our
consolidated financial statements for additional information. These reclassifications had no impact
on our consolidated statement of operations, consolidated balance sheet or consolidated statement
of cash flows.
Principles of consolidation. These consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) and include the accounts of First Solar, Inc. and all of its subsidiaries. We eliminated all
intercompany transactions and balances during consolidation.
Fiscal periods. We report the results of our operations using a 52 or 53 week fiscal year,
which ends on the Saturday on or before December 31. Fiscal 2009 ended on December 26, 2009; fiscal
2008 ended on December 27, 2008; and fiscal 2007 ended on December 29, 2007; all of these fiscal
years included 52 weeks. Our fiscal quarters end on the Saturday on or before the end of the
applicable calendar quarter.
Use of estimates. The preparation of consolidated financial statements in conformity with U.S.
GAAP requires us to make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and the accompanying notes. Significant estimates in these
consolidated financial statements include revenue recognition, allowances for doubtful accounts
receivable, inventory write-downs, estimates of future cash flows from and the economic useful
lives of long-lived assets, asset impairments, certain accrued liabilities, income taxes and tax
valuation allowances, accrued warranty expenses, accrued collection and recycling expense,
share-based compensation costs and fair value estimates. Actual results could differ materially
from these estimates under different assumptions and conditions.
Business Combinations. We account for business acquisitions using the acquisition method of
accounting and record definite lived intangible assets separate from goodwill. Intangible assets
are recorded at their fair value based on estimates as at the date of acquisition. Goodwill is
recorded as the residual amount of the purchase price less the fair value assigned to the
individual assets acquired and liabilities assumed as of the date of acquisition.
Goodwill. Goodwill represents the excess of the purchase price of acquired businesses over the
estimated fair value assigned to the individual assets acquired and liabilities assumed. We do not
amortize goodwill, but instead test goodwill for impairment at least annually in the fourth
quarter, and, if necessary, we would record any impairment in accordance with FASB Accounting
Standards Codification Topic (ASC) 350, Intangibles Goodwill and Other. We will perform an
impairment test between scheduled annual tests if facts and circumstances indicate that it is more
likely than not that the fair value of a reporting unit that has goodwill is less than its carrying
value. In
74
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
the process of our annual impairment review, we primarily use the income approach methodology of
valuation, which includes the discounted cash flow method, and the market approach methodology of
valuation, which considers values of comparable businesses to determine the fair value of our
goodwill. Significant management judgment is required in the forecasts of future operating results
and the discount rates that we use in the discounted cash flow method of valuation and in the
selection of comparable businesses that we used in the market approach.
Investment in related party. We own equity investments of another company in an amount that is
not sufficient to provide us with significant influence over the investees operations. Since the
fair values of these equity investments are not readily determinable, they are not within the scope
of the accounting guidance at ASC 320, Investments Debt and Equity Securities, and we account for
these equity investments using the cost method of accounting. Under the cost method of accounting,
we report investments at their acquisition cost on our consolidated balance sheet and would only
adjust these carrying values if we sell the investments or acquire more, or if the investments
become other-than-temporarily impaired.
Receivables and Allowance for doubtful accounts. Trade accounts receivable are recorded at the
invoiced amount as the result of transactions with customers. We maintain allowances for doubtful
accounts for uncollectible accounts receivable. We estimate anticipated losses from doubtful
accounts based on days past due, historical collection history and other factors.
Fair Value of Financial Instruments. We measure certain financial assets and liabilities at
fair value based on the price that would be received for an asset or paid to transfer a liability
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants. Our financial instruments consist principally of cash and cash
equivalents, marketable securities, notes receivable, restricted investments other than the deposit
with the financial services company, investment in related party, derivative contracts, accounts
payable, accrued expenses and income tax payable. See also Note 9: Fair Value Measurement to our
consolidated financial statements for further information on the fair value of our financial
instruments.
Foreign currency translation. The functional currencies of our European and Mexican
subsidiaries are their local currency. Accordingly, we apply the period end exchange rate to
translate their assets and liabilities and the weighted average exchange rate for the period to
translate their revenues, expenses, gains and losses into U.S. dollars. We include the translation
adjustments as a separate component of accumulated other comprehensive income within stockholders
equity. The functional currency of our subsidiaries in Canada, Malaysia and Singapore is the U.S.
dollar; therefore, we do not translate their financial statements.
Cash and cash equivalents. We consider all highly liquid investments with original maturities
of 90 days or less at the time of purchase to be cash equivalents.
Marketable securities current and noncurrent. Marketable securities with maturities greater
than 90 days, but less than one year at purchase, are recorded as marketable securities current.
Marketable securities with maturities greater than one year are recorded as marketable securities
noncurrent. We have classified our marketable securities as available-for-sale. These marketable
securities are recorded at fair value and unrealized gains and losses are recorded to accumulated
other comprehensive income (loss) until realized. Realized gains and losses on sales of all these
securities are reported in earnings, computed using the specific identification cost method. All of
our available-for-sale marketable securities are subject to a periodic impairment review. We
consider a marketable debt security to be impaired when its fair value is less than its carrying
cost. We subject investments identified as being impaired to further review to determine if the
investment is other than temporarily impaired, in which case, we write the investment down to its
impaired value, which establishes a new cost basis.
Inventories current and noncurrent. We report our inventories at the lower of cost or
market. We determine cost on a first-in, first-out basis and include both the costs of acquisition
and the costs of manufacturing in our inventory costs. These costs include direct material, direct
labor and fixed and variable indirect manufacturing costs, including depreciation and amortization.
75
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
We also regularly review the cost of inventory against its estimated market value and record a
lower of cost or market write-down if any inventories have a cost in excess of estimated market
value. For example, we regularly evaluate the quantity and value of our inventory in light of
current market conditions and market trends and record write-downs for any quantities in excess of
demand and for any product obsolescence. This evaluation considers historical usage, expected
demand, anticipated sales price, new product development schedules, the effect new products might
have on the sale of existing products, product obsolescence, customer concentrations, product
merchantability and other factors. Market conditions are subject to change and actual consumption
of our inventory could differ from forecasted demand. Our inventories have a long life cycle and
obsolescence has not historically been a significant factor in their valuation.
We classify inventories, primarily raw materials, not used within our normal operating cycle
as inventory noncurrent.
Project assets current and noncurrent. Project assets represent capitalized costs prior to
the sale of the solar power plant to a third party for project development or project construction
activities. Project assets consist primarily of costs for land and costs for developing and
constructing a solar power plant. Development costs can include legal, consulting, permitting costs
as well as other development costs. Once we enter into a definitive sales agreement, we reclassify
these costs to deferred project costs until we are able to recognize the sale of the project assets
as revenue. Project assets which are not expected to be sold within the next 12 months are
classified as project assets noncurrent.
Deferred project costs. Deferred project costs represent capitalized costs associated with
revenue that we have deferred for project development or project construction contracts signed with
third parties typically under an EPC agreement or other contractual arrangements, where the revenue
recognition criteria have not been met. Deferred project costs which are not expected to be
recognized within the next 12 months are classified as deferred project costs noncurrent, which are
classified with other liabilities noncurrent on our consolidated balance sheets.
Property, plant and equipment. We report our property, plant and equipment at cost, less
accumulated depreciation. Cost includes the price paid to acquire or construct the assets,
including interest capitalized during the construction period and any expenditures that
substantially add to the value of or substantially extend the useful life of an existing asset. We
expense repair and maintenance costs at the time we incur them.
We compute depreciation expense using the straight-line method over the estimated useful lives
of the assets, as presented in the table below. We amortize leasehold improvements over the shorter
of their estimated useful lives or the remaining term of the lease.
|
|
|
|
|
Useful Lives |
|
|
in Years |
Buildings |
|
40 |
Manufacturing machinery and equipment |
|
5 7 |
Furniture, fixtures, computer hardware and computer software |
|
3 5 |
Leasehold improvements |
|
up to 15 |
Interest Capitalization. We capitalize interest cost as part of the historical cost acquiring
or constructing certain assets during the period of time required to get the asset ready for its
intended use. During 2009, these assets consisted primarily of property, plant and equipment and
project assets, including deferred project costs. We capitalize interest to the extent that
expenditures to acquire or construct an asset have occurred and interest cost has been incurred.
Long-lived assets. We account for any impairment of our long-lived, tangible assets and
definite-lived intangible assets in accordance with ASC 360, Property, Plant and Equipment. As a
result, we assess long-lived assets classified as held and used, including our property, plant
and equipment, for impairment whenever events
76
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
or changes in business circumstances arise that may indicate that the carrying amount of our
long-lived assets may not be recoverable. These events would include significant current period
operating or cash flow losses associated with the use of a long-lived asset or group of assets
combined with a history of such losses, significant changes in the manner of use of assets and
significant negative industry or economic trends. We evaluated our long-lived assets for impairment
during 2009 and did not note any events or changes in circumstances indicating that the carrying
values of our material long-lived asset are not recoverable.
Product warranties. We provide a limited warranty to the original purchasers of our solar
modules for five years against defects in materials and workmanship under normal use and service
conditions following the date of sale, and we provide a warranty that the modules will produce at
least 90% of their power output rating during the first 10 years following the date of sale and at
least 80% of their power output rating during the following 15 years. In resolving claims under
both the defects and power output warranties, we have the option of either repairing or replacing
the covered module or, under the power output warranty, providing additional modules to remedy the
power shortfall. Our warranties are automatically transferred from the original purchaser of our
modules to a subsequent purchaser. When we recognize revenue for module sales, we accrue a
liability for the estimated future costs of meeting our warranty obligations for those modules. We
make and revise this estimate 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.
Accrued solar module collection and recycling liability. We recognize an expense for the
estimated fair value of our future obligations for collecting and recycling the solar modules that
we have sold at the time they reach the end of their useful lives.
Derivative Instruments. We recognize derivative instruments on our balance sheet at their fair
value. On the date that we enter into a derivative contract, we designate the derivative instrument
as fair-value hedge; a cash-flow hedge; a foreign currency fair value or cash flow hedge; a hedge
of a net investment in a foreign operations or a derivative instrument that will not be accounted
for using any of the specialized hedge-accounting methods specified in ASC 815, Derivatives and
Hedging. As of December 26, 2009 and December 27, 2008, all of our derivative instruments were
designated either as cash-flow hedges or as derivative instruments not accounted for using
hedge-accounting methods.
We record changes in the fair value of a derivative instrument that is highly effective and
that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective,
in other comprehensive income until our earnings are affected by the variability of cash flows of
the hedged transaction (that is, until we record periodic settlements of a variable-rate asset or
liability in earnings). We record any hedge ineffectiveness, which represents the amount by which
the changes in the fair value of the derivative instrument exceed the variability in the cash flows
of the forecasted transaction, in current-period earnings. We report changes in the fair values of
derivative instruments not accounted for using hedge-accounting in current-period earnings.
We formally document all relationships between hedging instruments and hedged items, as well
as our risk-management objective and strategy for undertaking various hedge transactions at
inception of the hedge. We support all our derivatives by documentation specifying the underlying
exposure being hedged. We also formally assess (both at the hedges inception and on an ongoing
basis) whether the derivative instruments that we use in hedging transactions have been highly
effective in offsetting changes in the fair value or cash flows of hedged items and whether those
derivatives are expected to remain highly effective in future periods. When we determine that a
derivative instrument is not (or has ceased to be) highly effective as a hedge, we discontinue
hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the
derivative instrument remains outstanding, we will carry the derivative instrument at its fair
value on our balance sheet and recognize subsequent changes in its fair value in our current period
earnings.
77
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Revenue recognition Components Business. We sell our solar modules directly to solar power
system integrators and operators and recognize revenue when persuasive evidence of an arrangement
exists, delivery of the product has occurred and title and risk of loss have passed to the
customer, the sales price is fixed or determinable and collectability of the resulting receivable
is reasonably assured. Under this policy, we record a trade receivable for the selling price of our
product and reduce inventory for the cost of goods sold when delivery occurs in accordance with the
terms of the sales contracts. We do not offer extended payment terms or rights of return for our
products. We account for price rebates granted to certain customers under our Long-Term Supply
Contracts as a reduction to the selling price of our solar modules; and therefore, as a reduction
to revenue.
Revenue recognition Systems Business. We provide a complete solar power system solution,
which includes project development, EPC services, O&M services and, when required, project finance.
Standalone EPC Contracts. For projects where we provide engineering, procurement and
constructions services under an EPC contract, which are typically cost-type or fixed-fee contracts,
we recognize revenue using the percentage-of-completion method of accounting using the cost-to-cost
methodology. We use this method because we consider costs incurred to be the best available measure
of progress on these contracts. We make estimates of the costs to complete a contract and recognize
revenue based on the estimated progress to completion. We periodically revise our profit estimates
based on changes in facts, and we immediately recognize any losses that we identify on contracts.
Incurred costs include all direct material, labor, subcontractor cost, and those indirect costs
related to contract performance, such as indirect labor, supplies and tools. We recognize job
material costs as incurred costs when the job materials have been installed. When contracts specify
that title to job materials transfers to the customer before installation has been performed, we
defer revenue and associated costs and recognize it upon installation, using the
percentage-of-completion method of accounting. We consider job materials to be installed materials
when they are permanently attached or fitted to the solar power systems as required by the
engineering design.
Sale of Project Assets. Revenue recognition for a given solar power project is dependent on
the structure of the agreement and whether we have gained control of land or land rights. If we
have not gained control of land or land rights prior to the execution of an EPC contract, we
account for any costs incurred, that are directly related to the development or construction of the
solar power project, as pre-contract cost and capitalize these costs in project assets on our
balance sheet. Upon the execution of the EPC contract, we recognize project assets in cost of
sales, utilizing a percentage-of-completion method of accounting using the cost-to-cost methodology
similar to standalone EPC Contracts.
If we have gained control of land or land rights, we account for the project following the
provisions of real estate accounting. Under the provisions of real estate accounting we recognize
revenue and the corresponding costs once the sale is consummated, the buyers initial and any
continuing investments are adequate, the resulting receivables are not subject to subordination and
we have transferred the customary risk and rewards of ownership to the buyer. In general, the sale
is consummated upon the execution of an agreement documenting the terms of the sale and a minimum
initial payment by the buyer to substantiate the transfer of risk to the buyer. As a result,
depending on the value of the initial and continuing payment commitment by the buyer, we generally
align our revenue recognition and release of project assets to cost of sale with the receipt of
payment from the buyer.
Our liability for billings in excess of costs and estimated earnings, which is part of the
balance sheet caption Other current liabilities, was $6.6 million and $2.2 million as of December
26, 2009 and December 27, 2008, respectively. This liability represents our billings in excess of
revenues recognized on our contracts, which results from differences between contractual billing
schedules and the timing of revenue recognition under our revenue recognition accounting policies.
For revenue arrangements that include multiple deliverables, we determine whether these
arrangements have more than one unit of accounting. Deliverable elements in a revenue arrangement
with multiple deliverables are separate units of accounting if the elements have standalone value
to the customer, if objective and reliable evidence
78
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
of the fair value of undelivered elements is available, and if the arrangement does not include a
general right of return related to delivered items. We apply the appropriate revenue recognition
principles to the identified elements.
In accordance with ASC 605, we present taxes assessed by governmental authorities that are
both imposed on and concurrent with specific revenue-producing transactions between us and our
customers (such as sales, use and value-added taxes) on a net basis and excluded from revenues.
Shipping and handling costs. We classify shipping and handling costs for solar modules shipped
to our customers as a component of cost of sales. We record customer payments of shipping and
handling costs as a component of net sales.
Share-based compensation. We account for share-based compensation arrangements in accordance
with ASC 718, Compensation Stock Compensation. Our significant accounting policies related to
share-based compensation arrangements are described at Note 16. Share-Based Compensation to our
consolidated financial statements.
Research and development expense. We incur research and development costs during the process
of researching and developing new products and enhancing our existing products, technologies and
manufacturing processes. Our research and development costs consist primarily of compensation and
related costs for personnel, materials, supplies, equipment depreciation and consultant and
laboratory testing costs. We expense these costs as incurred until the resulting product has been
completed and tested and is ready for commercial manufacturing.
We may be party to research grant contracts with the United States federal government under
which we receive reimbursements for specified costs incurred for certain of our research projects.
We record amounts recoverable from these grants as an offset to research and development expense
when the related research and development costs are incurred, which is consistent with the timing
of our contractual right to receive the cost reimbursements. During the year ended December 26,
2009, we did not have any grant proceeds included as offsets to research and development expense.
We have included grant proceeds of $0.9 million and $1.8 million as offsets to research and
development expense during the years ended December 27, 2008 and December 29, 2007, respectively.
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, to the extent we cannot
capitalize the expenditure.
Income taxes. We account for income taxes in accordance with ASC 740, Income Taxes, which
prescribes the use of the asset and liability method whereby we calculate the deferred tax asset or
liability account balances at the balance sheet date using tax laws and rates in effect at that
time. We establish valuation allowances, when necessary, to reduce deferred tax assets to the
extent it is more likely than not that such deferred tax assets will not be realized. We do not
provide deferred taxes related to the U.S. GAAP basis in excess of the U.S. tax basis in the
investment in our foreign subsidiaries to the extent such amounts relate to permanently reinvested
earnings and profits of such foreign subsidiaries.
In accordance with ASC 740, income tax expense includes (i) deferred tax expense, which
generally represents the net change in the deferred tax asset or liability balance during the year
plus any change in valuation allowances and (ii) current tax expense, which represents the amount
of tax currently payable to or receivable from a taxing authority. We only recognize tax benefits
related to uncertain tax positions to the extent they satisfy the recognition and measurement
criteria under ASC 740. Only those uncertain tax positions that are more likely than not of being
sustained upon examination satisfy the recognition criteria. For those positions that satisfy the
recognition criteria, the amount of tax benefit that we recognize is the largest amount of tax
benefit that is more than fifty percent likely of being sustained on ultimate settlement of such
uncertain tax position.
79
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Per share data. Basic income per share is based on the weighted effect of all common shares
outstanding and is calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted income per share is based on the weighted effect of
all common shares and dilutive potential common shares outstanding and is calculated by dividing
net income by the weighted average number of common shares and dilutive potential common shares
outstanding during the period.
Advertising Costs. Advertising costs are expensed as incurred. Advertising costs during the
years ended December 26, 2009, December 27, 2008 and December 29, 2007 were $1.1 million, $1.0
million and $0.6 million, respectively.
Comprehensive income. Our comprehensive income consists of our net income, changes in
unrealized gains or losses on derivative instruments that we hold and that qualify as and that we
have designated as cash flow hedges and the effects on our consolidated financial statements of
translating the financial statements of our subsidiaries that operate in foreign currencies. In
addition, other comprehensive income includes unrealized gains or losses on available-for-sale
securities, the impact of which has been excluded from net income. We present our comprehensive
income in combined consolidated statements of members/stockholders equity and comprehensive
income. Our accumulated other comprehensive income is presented as a component of equity in our
consolidated balance sheets and consists of the cumulative amount of net financial statement
translation adjustments, unrealized gains or losses on cash flow hedges and unrealized gains or
losses on available for sale marketable securities that we have incurred since the inception of our
business.
Recent accounting pronouncements. In August 2009, the FASB issued Accounting Standards Update
(ASU) 2009-05, Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair
Value. The fair value measurement of a liability assumes transfer to a market participant on the
measurement date, not a settlement of the liability with the counterparty. ASU 2009-05 describes
various valuation methods that can be applied to estimating the fair values of liabilities,
requires the use of observable inputs and minimizes the use of unobservable valuation inputs. ASU
2009-05 is effective for the fourth quarter of 2009. The adoption of ASU 2009-05 did not have a
material impact on our financial position, results of operations or cash flows.
In September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740) Implementation
Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic
Entities. ASU 2009-06 provides guidance on how to account for uncertainty in income taxes,
especially for attribution of income taxes between a pass through entity and its owners. In
addition, ASU 2009-06 clarifies managements determination of the taxable status of an entity and
amends certain disclosure requirements. ASU 2009-06 is effective for the third quarter of 2009. The
adoption of ASU 2009-06 had no impact on our financial position, results of operations or cash
flows.
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements. ASU 2009-13 revises certain accounting for revenue
arrangements with multiple deliverables. In particular when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, ASU 2009-13 allows
use of a best estimate of the selling price to allocate the arrangement consideration among them.
ASU 2009-13 is effective for the first quarter of 2011, with early adoption permitted. We do not
expect that the adoption of ASU 2009-13 will have a material impact on our financial position,
results of operations or cash flows.
In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) Certain Revenue
Arrangements That Include Software Elements. ASU 2009-14 changes the accounting model for revenue
arrangements that involve a combination of tangible products and software. Tangible products
containing software components and non-software components that function together to deliver the
tangible products essential functionality are no longer within the scope of the software revenue
recognition guidance in ASC 985. ASU 2009-14 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
80
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 15, 2010 with early adoption permitted. We do not expect that the adoption of ASU 2009-14 will
have a material impact on our financial position, results of operations or cash flows.
In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends the accounting
and reporting guidance for debt (and certain preferred stock) with specific conversion features or
other options. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009.
We dont expect that the adoption of ASU 2009-15 will have a material impact on our financial
position, results of operations or cash flows.
In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
Accounting for Transfers of Financial Assets. ASU 2009-16 amends the accounting for transfers of
financials assets and will require more information about transfers of financial assets, including
securitizations, and where entities have continuing exposure to the risks related to transferred
financial assets. ASU 2009-16 is effective at the start of a reporting entitys first fiscal year
beginning after November 15, 2009, with early adoption not permitted. We do not expect that the
adoption of ASU 2009-16 will have a material impact on our financial position, results of
operations or cash flows
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 changes
how a reporting entity determines when an entity that is insufficiently capitalized or is not
controller through voting (or similar rights) should be consolidated. ASU 2009-17 also requires a
reporting entity to provide additional disclosures about its involvement with variable interest
entities and any significant changes in risk exposure due to that involvement. ASU 2009-17 is
effective at the start of a reporting entitys first fiscal year beginning after November 15, 2009,
or January 1, 2010, for a calendar year entity. Early adoption is not permitted. We do not expect
that the adoption of ASU 2009-17 will have a material impact on our financial position, results of
operations or cash flows.
In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) Accounting for
Distributions to Shareholders with Components of Stock and Cash. ASU 2010-01 clarifies that the
stock portion of a distribution to shareholders that allows them to elect to receive cash or shares
with a potential limitation on the amount of cash that all shareholders can elect to receive is
considered a share issuance. ASU 2010-01 is effective for interim and annual periods ending on or
after December 15, 2009 and should be applied on a retrospective basis. The adoption of ASU 2010-01
did not have any impact on our financial position, results of operations or cash flows.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) Accounting and
Reporting for Decreases in Ownership of a Subsidiary A Scope Clarification. ASU 2010-02 clarifies
the scope of the decrease in ownership provisions of Subtopic 810 and expands the disclosure
requirements about deconsolidation of a subsidiary or de-recognition of a group of assets. ASU
2010-02 is effective beginning in the first interim of annual reporting period ending on or after
December 15, 2009. The amendments in ASU 2010-02 must be applied retrospectively to the first
period that an entity adopted SFAS 160. The adoption of ASU 2010-02 did not have any impact on our
financial position, results of operations or cash flows.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements. This ASU requires new disclosures and
clarifies certain existing disclosure requirements about fair value measurements. ASU 2010-06
requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2
fair value measurements, to describe the reasons for the transfers and to present separately
information about purchases, sales, issuances and settlements for fair value measurements using
significant unobservable inputs. ASU 2010-06 is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements, which is effective
for interim and annual reporting periods beginning after December 15, 2010; early adoption is
permitted. We do not expect that the adoption of ASU 2010-06 will have a material impact on our
financial position, results of operations or cash flows.
81
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 3. Acquisitions
OptiSolar
On April 3, 2009, we completed the acquisition of the solar power project development business
(the Project Business) of OptiSolar Inc. (OptiSolar). Pursuant to an Agreement and Plan of Merger
(the Merger Agreement) dated March 2, 2009, by and among First Solar, Inc., First Solar Acquisition
Corp. (Merger Sub), OptiSolar and OptiSolar Holdings LLC (OptiSolar Holdings), Merger Sub merged
with and into OptiSolar, with OptiSolar surviving as a wholly-owned subsidiary of First Solar, Inc.
(the Merger). Pursuant to the Merger, all the outstanding shares of common stock of OptiSolar held
by OptiSolar Holdings were exchanged for 2,972,420 shares of First Solar common stock, par value
$0.001 per share (the Merger Shares), of which 732,789 shares were issued and deposited with an
escrow agent to support certain indemnification obligations of OptiSolar Holdings. Also, 355,096
shares were holdback shares as further described below under Contingent Consideration (the
Holdback Shares). As of December 26, 2009, 2,951,256 Merger Shares had been issued. The period
during which claims for indemnification from the escrow fund may be initiated began on April 3,
2009 and will end on April 3, 2011.
Purchase Price Consideration
The total consideration for this acquisition, based on the closing price of our common stock
on April 3, 2009 of $134.38 per share, was $399.4 million.
Contingent Consideration
Pursuant to the Merger Agreement, of the 2,972,420 Merger Shares, as of April 3, 2009, 355,096
shares were Holdback Shares that were issuable to OptiSolar Holdings upon satisfaction of
conditions relating to certain then-existing liabilities of OptiSolar. As of December 26, 2009,
333,932 Holdback Shares had been issued to OptiSolar Holdings. The estimated fair value of the
21,164 Holdback Shares remaining to be issued at December 26, 2009 was $2.8 million and has been
classified separately within stockholders equity on our balance sheet.
Purchase Price Allocation
We accounted for this acquisition using the acquisition method in accordance with ASC 805.
Accordingly, we allocated the purchase price to the acquired assets and liabilities based on their
estimated fair values at the acquisition date of April 3, 2009, as summarized in the following
table (in thousands):
|
|
|
|
|
Tangible assets acquired |
|
$ |
10,175 |
|
Project assets |
|
|
103,888 |
|
Deferred tax assets, net |
|
|
35,195 |
|
Goodwill |
|
|
250,176 |
|
|
|
|
|
Total purchase consideration |
|
$ |
399,434 |
|
|
|
|
|
82
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The fair value of net tangible assets acquired on April 3, 2009 consisted of the following (in
thousands):
|
|
|
|
|
Cash |
|
$ |
318 |
|
Prepaid expenses and other current assets |
|
|
5,003 |
|
Property, plant and equipment |
|
|
165 |
|
Project assets Land |
|
|
6,100 |
|
Total identifiable assets acquired |
|
|
11,586 |
|
Accounts payable and other liabilities |
|
|
(1,411 |
) |
Total liabilities assumed |
|
|
(1,411 |
) |
|
|
|
|
Net identifiable assets acquired |
|
$ |
10,175 |
|
|
|
|
|
Goodwill
We recorded the excess of the acquisition date fair value of consideration transferred over
the estimated fair value of the net tangible assets and intangible assets acquired as goodwill.
Subsequent to the acquisition of OptiSolar, we adjusted goodwill downward by $8.5 million as
additional information relating to acquired deferred tax assets became available. We have allocated
$251.3 million and $1.4 million of this goodwill to our components reporting segment and our
systems segment (reported under Other in our disclosure of segment operating results),
respectively. This goodwill is not deductible for tax purposes.
Acquired project assets
Management engaged a third-party valuation firm to assist in the determination of the fair
value of the acquired project development business. In our determination of the fair value of the
project assets acquired, we considered among other factors, three generally accepted valuation
approaches: the income approach, market approach and cost approach. We selected the approaches that
are most indicative of fair value of the assets acquired. We used the income approach to calculate
the fair value of the acquired projects assets based on estimates and assumptions of future
performance of these projects assets provided by OptiSolars and our management. We used the market
approach to determine the fair value of the land acquired with those assets.
Pro Forma Information
The acquired OptiSolar business has been engaged in the development and construction of solar
power projects. The costs related to these activities are largely capitalized, and not charged
against earnings until the respective solar power project is sold to a customer, constructed for a
customer or we determine that the project is no longer commercially viable; during the fourth
quarter of 2009 we sold one of the projects in the portfolio that we acquired from OptiSolar.
If the OptiSolar acquisition had been completed on December 28, 2008 (the beginning of our
fiscal year 2009) our total revenue, net income, and basic and diluted earnings per common share
would have not materially changed from the amounts that we have previously reported.
Turner Renewable Energy LLC
On November 30, 2007, we acquired 100% of the outstanding membership interests of Turner
Renewable Energy, LLC. The acquisition provided us with solar power project engineering and project
management skills that enable us to deploy cost effective solar electricity solutions for utility
companies seeking to meet renewable energy portfolio standard requirements in markets in the United
States. In connection with this acquisition we issued an aggregate of 118,346 shares of our common
stock to the members of Turner Renewable Energy, LLC in satisfaction of a portion of the purchase
price. The fair value of our common stock issued was determined based on the closing
83
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
price of our common stock on November 30, 2007. The results of Turner Renewable Energy, LLC have
been included in our consolidated results of operations since December 1, 2007.
Note 4. Goodwill and Intangible Assets
Goodwill
On November 30, 2007, we acquired 100% of the outstanding membership interests of Turner
Renewable Energy, LLC. Under the purchase method of accounting, we allocated $33.4 million to
goodwill through December 29, 2007, which represents the excess of the purchase price over the fair
value of the identifiable net tangible and intangible assets of Turner Renewable Energy, LLC. All
of this goodwill was allocated to our systems segment (reported under Other in our disclosure of
segment operating results). At December 26, 2009 and December 27, 2008, the carrying amount of this
goodwill was $33.8 million.
On April 3, 2009, we acquired the solar power project development business of OptiSolar. Under
the acquisition method of accounting, we allocated $261.1 million to goodwill (excluding subsequent
adjustments of $8.5 million), which primarily represents the synergies and economies of scale
expected from acquiring OptiSolars project pipeline and using our solar modules in the acquired
projects.
During 2009, we adjusted goodwill downward by $8.5 million as additional information relating
to acquired deferred tax assets became available. We have allocated $251.3 million and $1.4 million
of this goodwill to our components reporting segment and systems segment (reported under Other in
our disclosure of segment operating results), respectively. At December 26, 2009, the carrying
amount of this goodwill was $252.7 million. See Note 3. Acquisitions to our consolidated
financial statements for additional information about this acquisition.
The changes in the carrying amount of goodwill for the years ended December 26, 2009 and
December 27, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components |
|
|
Systems |
|
|
Consolidated |
|
Beginning balance, December 29, 2007 |
|
$ |
|
|
|
$ |
33,449 |
|
|
$ |
33,449 |
|
Goodwill adjustment(1) |
|
|
|
|
|
|
380 |
|
|
|
380 |
|
Beginning balance, December 27, 2008 |
|
|
|
|
|
|
33,829 |
|
|
|
33,829 |
|
Goodwill from 2009 acquisition |
|
|
259,722 |
|
|
|
1,411 |
|
|
|
261,133 |
|
Goodwill adjustment(2) |
|
|
(8,447 |
) |
|
|
|
|
|
|
(8,447 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance, December 26, 2009 |
|
$ |
251,275 |
|
|
$ |
35,240 |
|
|
$ |
286,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The goodwill adjustment of $0.4 million, which we made during 2008, was primarily the result of
adjustments made to the opening balance sheet for acquisition-related intangible assets and related
deferred taxes. |
|
(2) |
|
The goodwill adjustments were primarily the result of adjustments to the amount of acquired
deferred tax assets. |
ASC 350, Intangibles Goodwill and Other, requires us to test goodwill for impairment at
least annually, or sooner, if facts or circumstances between scheduled annual tests indicate that
it is more likely than not that the fair value of a reporting unit that has goodwill might be less
than its carrying value. We performed our goodwill impairment test in the fourth fiscal quarter of
the year ended December 26, 2009 and determined that the fair value of our goodwill substantially
exceeded the carrying value. Based on the test, we concluded that our goodwill was not impaired. We
have also concluded that there have been no changes in facts and circumstances since the date of
that test, that would trigger an interim goodwill impairment test.
84
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Acquisition Related Intangible Assets
In connection with the acquisition of Turner Renewable Energy, LLC, we identified intangible
assets that represent customer contracts already in progress and future customer contracts not yet
started at the time of acquisition. We amortize the acquisition date fair values of these assets
using the percentage-of-completion method.
Information regarding our acquisition-related intangible assets that were being amortized was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009 |
|
|
As of December 27, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Customer contracts in progress at
the acquisition date |
|
$ |
62 |
|
|
$ |
62 |
|
|
$ |
|
|
|
$ |
62 |
|
|
$ |
58 |
|
|
$ |
4 |
|
Customer contracts executed
after the acquisition date |
|
|
394 |
|
|
|
394 |
|
|
|
|
|
|
|
394 |
|
|
|
242 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
456 |
|
|
$ |
456 |
|
|
$ |
|
|
|
$ |
456 |
|
|
$ |
300 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, we concluded that the carrying amount of certain customer intangible assets would
not be realized due to our not pursuing certain projects that did not fit our overall business
strategy. We recognized the resulting impairment loss of $1.3 million in cost of sales.
Amortization expense for acquisition-related intangible assets was $0.2 million and $0.3 million
for the years ended December 26, 2009 and December 27, 2008, respectively.
Project Assets
In connection with the acquisition of the solar power project development business of
OptiSolar, we measured at fair value certain acquired project assets based on the varying
development stages of each project asset on the acquisition date. Once we enter into a definitive
sales agreement, we reclassify these costs to deferred project costs. We expense these project
assets to cost of sales as each respective project asset or solar power system is sold to a
customer, constructed for a customer (matching the underlying revenue recognition method) or if we
determine that the project is commercially not viable. See also Note 7. Consolidated Balance Sheet
Details to our consolidated financial statements about balances for project assets.
Other Intangible Assets
Included in other noncurrent assets on our consolidated balance sheets are
internally-generated intangible assets, substantially all of which are patents on technologies
related to our products and production processes. We record an asset for patents, after the patent
has been issued, based on the legal, filing and other costs incurred to secure them and amortize
these costs on a straight-line basis over estimated useful lives ranging from 4 to 20 years. These
intangible assets have a weighted-average useful life of approximately ten years.
Amortization expense for our patents was $0.1 million for the years ended December 26, 2009
and December 27, 2008, respectively, and was less than $0.1 million for the year ended December 29,
2007. These intangible assets consisted of the following at December 26, 2009 and December 27, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Intangible assets, gross |
|
$ |
1,472 |
|
|
$ |
1,472 |
|
Accumulated amortization |
|
|
(1,224 |
) |
|
|
(1,199 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
248 |
|
|
$ |
273 |
|
|
|
|
|
|
|
|
85
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Estimated future amortization expense for our patents is as follows at December 26, 2009 (in
thousands):
|
|
|
|
|
2010 |
|
$ |
25 |
|
2011 |
|
$ |
25 |
|
2012 |
|
$ |
25 |
|
2013 |
|
$ |
25 |
|
2014 |
|
$ |
25 |
|
Thereafter |
|
$ |
123 |
|
Total estimated future patent amortization expense |
|
$ |
248 |
|
Note 5. Cash and Investments
Cash, cash equivalents and marketable securities consisted of the following at December 26,
2009 and December 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
269,068 |
|
|
$ |
603,434 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
|
|
|
|
38,832 |
|
Money market mutual fund |
|
|
395,431 |
|
|
|
73,952 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
664,499 |
|
|
|
716,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
78,911 |
|
|
|
68,086 |
|
Foreign agency debt |
|
|
168,963 |
|
|
|
6,977 |
|
Supranational debt |
|
|
71,050 |
|
|
|
|
|
Corporate debt securities |
|
|
115,248 |
|
|
|
30,538 |
|
Foreign government obligations |
|
|
10,128 |
|
|
|
|
|
Asset backed securities |
|
|
5,544 |
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
|
449,844 |
|
|
|
105,601 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
1,114,343 |
|
|
$ |
821,819 |
|
|
|
|
|
|
|
|
We have classified our marketable securities as available-for-sale. Accordingly, we record
them at fair value and account for net unrealized gains and losses as part of accumulated 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
year ended December 26, 2009, we realized $0.2 million in gains and an immaterial amount in losses
on our marketable securities. During the year ended December 27, 2008, we realized $0.6 million in
gains and $0.4 million in losses on our marketable securities. During the year ended December 29,
2007 we did not realize any gains or losses on our marketable securities. See Note 9. Fair Value
Measurement to our consolidated financial statements for information about the fair value
measurement of our marketable securities.
All of our available-for-sale marketable securities are subject to a periodic impairment
review. We consider a marketable debt security to be impaired when its fair value is less than its
carrying cost, in which case we would further review the investment to determine whether it is
other-than-temporarily impaired. When we evaluate an investment for other-than-temporary
impairment, we review factors such as the length of time and extent to which
86
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
fair value has been below cost basis, the financial condition of the issuer and any changes
thereto, our intent to sell, and whether it is more likely than not we will be required to sell the
investment before we have recovered its cost basis. If an investment is other-than-temporarily
impaired, we write it down through earnings to its impaired value and establish that as a new cost
basis for the investment. We did not identify any of our marketable securities as
other-than-temporarily impaired at December 26, 2009 and December 27, 2008.
The following table summarizes unrealized gains and losses related to our investments in
marketable securities designated as available-for-sale by major security type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
Security Type |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Federal agency debt |
|
$ |
78,803 |
|
|
$ |
108 |
|
|
$ |
|
|
|
$ |
78,911 |
|
Foreign agency debt |
|
|
168,541 |
|
|
|
588 |
|
|
|
166 |
|
|
|
168,963 |
|
Supranational debt |
|
|
70,807 |
|
|
|
269 |
|
|
|
26 |
|
|
|
71,050 |
|
Corporate debt securities |
|
|
114,912 |
|
|
|
475 |
|
|
|
139 |
|
|
|
115,248 |
|
Foreign government obligations |
|
|
10,057 |
|
|
|
71 |
|
|
|
|
|
|
|
10,128 |
|
Asset backed securities |
|
|
5,528 |
|
|
|
19 |
|
|
|
3 |
|
|
|
5,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
448,648 |
|
|
$ |
1,530 |
|
|
$ |
334 |
|
|
$ |
449,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 27, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
Security Type |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Federal agency debt |
|
$ |
67,813 |
|
|
$ |
273 |
|
|
$ |
|
|
|
$ |
68,086 |
|
Foreign agency debt |
|
|
6,990 |
|
|
|
|
|
|
|
13 |
|
|
|
6,977 |
|
Corporate debt securities |
|
|
30,425 |
|
|
|
129 |
|
|
|
16 |
|
|
|
30,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,228 |
|
|
$ |
402 |
|
|
$ |
29 |
|
|
$ |
105,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities of our available-for-sale marketable securities as of December 26, 2009
and December 27, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
Maturity |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
One year or less |
|
$ |
119,911 |
|
|
$ |
327 |
|
|
$ |
2 |
|
|
$ |
120,236 |
|
One year to two years |
|
|
269,488 |
|
|
|
963 |
|
|
|
185 |
|
|
|
270,266 |
|
Two years to three years |
|
|
59,249 |
|
|
|
240 |
|
|
|
147 |
|
|
|
59,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
448,648 |
|
|
$ |
1,530 |
|
|
$ |
334 |
|
|
$ |
449,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 27, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
Maturity |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
One year or less |
|
$ |
75,856 |
|
|
$ |
199 |
|
|
$ |
13 |
|
|
$ |
76,042 |
|
One year to two years |
|
|
29,372 |
|
|
|
203 |
|
|
|
16 |
|
|
|
29,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,228 |
|
|
$ |
402 |
|
|
$ |
29 |
|
|
$ |
105,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The net unrealized gain of $1.2 million and $0.4 million as of December 26, 2009 and December
27, 2008, respectively, on our available-for-sale marketable securities was primarily the result of
changes in interest rates. We typically invest in highly-rated securities with low probabilities of
default. Our investment policy requires investments to be rated single A or better and limits the
security types, issuer concentration and duration of the investments.
The following table shows gross unrealized losses and estimated fair values for those
investments that were in an unrealized loss position as of December 26, 2009 and December 27, 2008,
aggregated by investment category and the length of time that individual securities have been in a
continuous loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009 |
|
|
|
In Loss Position for |
|
|
In Loss Position for |
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Security Type |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Foreign agency debt |
|
$ |
45,329 |
|
|
$ |
166 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
45,329 |
|
|
$ |
166 |
|
Supranational debt |
|
|
7,201 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
7,201 |
|
|
|
26 |
|
Corporate debt securities |
|
|
32,303 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
32,303 |
|
|
|
139 |
|
Asset backed securities |
|
|
2,868 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
2,868 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,701 |
|
|
$ |
334 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
87,701 |
|
|
$ |
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 27, 2008 |
|
|
|
In Loss Position for |
|
|
In Loss Position for |
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Security Type |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Foreign agency debt |
|
$ |
6,977 |
|
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,977 |
|
|
$ |
13 |
|
Corporate debt securities |
|
|
9,088 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
9,088 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,065 |
|
|
$ |
29 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,065 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Restricted Cash and Investments
Restricted cash and investments consisted of the following at December 26, 2009 and December
27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Restricted cash |
|
$ |
27 |
|
|
$ |
4,218 |
|
Restricted investments |
|
|
36,467 |
|
|
|
|
|
Deposit with financial services company |
|
|
|
|
|
|
25,841 |
|
|
|
|
|
|
|
|
Total restricted cash and investments noncurrent |
|
$ |
36,494 |
|
|
$ |
30,059 |
|
|
|
|
|
|
|
|
At December 26, 2009, our restricted investments consisted of long-term marketable securities
that we hold through a custodial account to fund future costs of our solar module collection and
recycling program. At December 27, 2008, our restricted investments consisted of a funding
arrangement for our solar module collection and recycling program (See Note 12. Module Collection
and Recycling Liability to our consolidated financial statements), a debt service reserve account
of $4.2 million for our credit facility with a consortium of banks led by IKB Deutsche
Industriebank AG (See Note 13. Debt to our consolidated financial statements) and cash held by a
financial institution as collateral for a letter of credit.
88
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
We pre-fund our estimated solar module collection and recycling costs at the time of module
sale through a custodial account with a large bank as investment advisor in the name of a trust,
for which First Solar Inc., First Solar Malaysia Sdn. Bhd. and First Solar Manufacturing GmbH are
grantors. We fund this custodial account within 60 days of the beginning of a fiscal year for the
prior year module sales, assuming for this purpose a minimum service life of 25 years for our solar
modules. Prior to June 2009, we pre-funded our estimated solar module collection and recycling
costs through a financial services company. At December 27, 2008, the cumulative amount of deposits
made was $25.8 million (including the investment returns earned through that date). We commuted
this deposit with the financial services company during the year ended December 26, 2009 and
invested the proceeds in the restricted investments.
The following table summarizes unrealized gains and losses related to our restricted
investments in marketable securities designated as available-for-sale by major security type (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
Security Type |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government obligations |
|
$ |
783 |
|
|
$ |
|
|
|
$ |
27 |
|
|
$ |
756 |
|
Foreign government obligations |
|
|
34,403 |
|
|
|
1,308 |
|
|
|
|
|
|
|
35,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,186 |
|
|
$ |
1,308 |
|
|
$ |
27 |
|
|
$ |
36,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009, the contractual maturities of these available-for-sale marketable
securities were between 18 and 26 years. We did not have any restricted investments in marketable
securities as of December 27, 2008.
Note 7. Consolidated Balance Sheet Details
Accounts receivable, net
Accounts receivable, net consisted of the following at December 26, 2009 and December 27, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Accounts receivable, gross |
|
$ |
227,816 |
|
|
$ |
61,703 |
|
Allowance for doubtful account |
|
|
(990 |
) |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
226,826 |
|
|
$ |
61,703 |
|
|
|
|
|
|
|
|
The increase in accounts receivable was mainly due to the amendment of certain of our
customers Long-Term Supply Contracts to extend their payment terms from net 10 days to net 45
days at the end of the first quarter of 2009 primarily to increase liquidity in our sales
channel and to reflect longer shipment times from our plants in Malaysia and due to higher
volumes shipped during the year ended December 26, 2009.
During 2009, we amended our Long-Term Supply Contracts with certain of our customers to
implement a program which extends a price rebate to certain of these customers for solar modules
purchased from us. The intent of this program is to enable our customers to successfully compete
in our core segments in Germany. The rebate program applies a specified rebate rate to solar
modules sold for solar power projects in Germany at the beginning of each quarter for the
upcoming quarter. The rebate program is subject to periodic review and we will adjust the rebate
rate quarterly upward or downward as appropriate. The rebate period began during the third
quarter of 2009 and ends at the end of the fourth quarter of 2010. Customers need to meet
certain requirements in order to be eligible for and benefit from this program.
89
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
We account for these rebates as a reduction to the selling price of our solar modules and therefore
as a reduction in revenue at the time of sale. No rebates granted under this program can be claimed
in cash and all will be applied to reduce outstanding accounts receivable balances. During the year
ended December 26, 2009, we extended rebates to customers in the amount of 87.1
million ($128.9 million at the average exchange rate of $1.48/1.00). At December 26,
2009 we had 54.3 million ($78.2 million at the balance sheet close rate on December
26, 2009 of $1.44/1.00) of rebate claims accrued, which reduced our accounts
receivable accordingly.
In June 2009, we provided an allowance for doubtful accounts receivable in the amount of
$7.0 million due to the collectability of the outstanding accounts receivable from a specific
customer. As of December 26, 2009, we had collected $6.0 million of the overdue accounts
receivable from this specific customer and reduced our allowance for the doubtful account
accordingly.
Inventories
Inventories consisted of the following at December 26, 2009 and December 27, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
December 27, |
|
|
2009 |
|
2008 |
Raw materials |
|
$ |
122,282 |
|
|
$ |
103,725 |
|
Work in process |
|
|
6,248 |
|
|
|
4,038 |
|
Finished goods |
|
|
45,986 |
|
|
|
13,791 |
|
Total inventories |
|
$ |
174,516 |
|
|
$ |
121,554 |
|
Inventory current |
|
$ |
152,821 |
|
|
$ |
121,554 |
|
Inventory noncurrent(1) |
|
$ |
21,695 |
|
|
$ |
|
|
|
|
|
(1) |
|
Raw materials not used within our normal operating cycle are classified as inventory
noncurrent. |
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following at December 26, 2009
and December 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Prepaid expenses |
|
$ |
33,095 |
|
|
$ |
32,158 |
|
Deferred project costs |
|
|
36,670 |
|
|
|
710 |
|
Notes receivable (See Note 11. Notes Receivable) |
|
|
50,531 |
|
|
|
|
|
Derivative instruments |
|
|
7,909 |
|
|
|
34,931 |
|
Other current assets |
|
|
35,924 |
|
|
|
24,163 |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
|
$ |
164,129 |
|
|
$ |
91,962 |
|
|
|
|
|
|
|
|
90
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Project Assets Current and Noncurrent
Project assets current and noncurrent consisted of the following at December 26, 2009 and
December 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Project assets acquired through OptiSolar |
|
$ |
71,037 |
|
|
$ |
|
|
Project assets land |
|
|
1,452 |
|
|
|
|
|
Project assets other |
|
|
60,007 |
|
|
|
|
|
|
|
|
|
|
|
|
Total project assets |
|
$ |
132,496 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total project assets current |
|
$ |
1,081 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total project assets noncurrent |
|
$ |
131,415 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Project assets consist primarily of costs relating to solar power projects in various
stages of development that we capitalize prior to the sale of the solar power project to a third
party for project development or project construction activities. These costs include costs for
land and costs for developing and constructing a solar power plant. Development costs can
include legal, consulting, permitting costs as well as other development costs. Once we enter
into a definitive sales agreement, we reclassify these costs to deferred project costs until we
are able to recognize the sale of the project assets as revenue. Project assets acquired in
connection with the acquisition of OptiSolar were measured at fair value on the acquisition
date. Subsequent to the acquisition of OptiSolar, we incurred additional costs to further
develop these projects.
We expense these project assets to cost of sales as each respective project asset or solar
power system is sold to a customer, constructed for a customer (matching the underlying revenue
recognition method) or if we determine that the project is commercially not viable. See also
Note 4. Goodwill and Intangible Assets to our consolidated financial statements for further
information.
Property, plant and equipment, net
Property, plant and equipment, net consisted of the following at December 26, 2009 and
December 27, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Buildings and improvements |
|
$ |
239,088 |
|
|
$ |
137,116 |
|
Machinery and equipment |
|
|
813,281 |
|
|
|
559,566 |
|
Office equipment and furniture |
|
|
38,845 |
|
|
|
22,842 |
|
Leasehold improvements |
|
|
15,870 |
|
|
|
11,498 |
|
|
|
|
|
|
|
|
Depreciable property, plant and equipment, gross |
|
|
1,107,084 |
|
|
|
731,022 |
|
Accumulated depreciation |
|
|
(225,790 |
) |
|
|
(100,939 |
) |
|
|
|
|
|
|
|
Depreciable property, plant and equipment, net |
|
|
881,294 |
|
|
|
630,083 |
|
Land |
|
|
4,995 |
|
|
|
5,759 |
|
Construction in progress |
|
|
102,493 |
|
|
|
206,780 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
988,782 |
|
|
$ |
842,622 |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment was $124.6 million, $61.1 million and $24.8
million for the years ended December 26, 2009, December 27, 2008 and December 29, 2007,
respectively.
91
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Capitalized Interest
We incurred interest cost and capitalized a portion of it (into our property, plant and
equipment and project assets) as follows during the years ended December 26, 2009, December 27,
2008 and December 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest cost incurred |
|
$ |
11,902 |
|
|
$ |
7,394 |
|
|
$ |
6,065 |
|
Interest cost capitalized property, plant and equipment |
|
|
(3,310 |
) |
|
|
(6,885 |
) |
|
|
(3,771 |
) |
Interest cost capitalized project assets |
|
|
(3,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
5,258 |
|
|
$ |
509 |
|
|
$ |
2,294 |
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
Accrued expenses consisted of the following at December 26, 2009 and December 27, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Accrued compensation and benefits |
|
$ |
53,856 |
|
|
$ |
32,145 |
|
Accrued property, plant and equipment |
|
|
35,811 |
|
|
|
44,115 |
|
Accrued inventory |
|
|
27,542 |
|
|
|
31,438 |
|
Product warranty liability |
|
|
8,216 |
|
|
|
4,040 |
|
Other accrued expenses |
|
|
61,257 |
|
|
|
29,161 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
186,682 |
|
|
$ |
140,899 |
|
|
|
|
|
|
|
|
Other current liabilities
Other current liabilities consisted of the following at December 26, 2009 and December 27,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
|
|
2009 |
|
|
2008 |
|
Deferred revenue(1) |
|
$ |
31,127 |
|
|
$ |
|
|
Derivative instruments |
|
|
30,781 |
|
|
|
50,733 |
|
Other current liabilities |
|
|
33,294 |
|
|
|
9,005 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
95,202 |
|
|
$ |
59,738 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deferred revenue will be recognized once all revenue recognition criteria have been met. |
Note 8. Derivative Instruments
As a global company, we are exposed in the normal course of business to interest rate and
foreign currency risks that could affect our net assets, financial position, results of
operations and cash flows. We use derivative instruments to hedge against certain risks, such as
these, and we only hold derivative instruments for hedging purposes, not for speculative or
trading purposes. Our use of derivative instruments is subject to strict internal controls based
on centrally defined, performed and controlled policies and procedures.
Depending on the terms of the specific derivative instruments and market conditions, some
of our derivative instruments may be assets and others liabilities at any particular point in
time. As required by ASC 815, Derivatives and Hedging, we report all of our derivative
instruments at fair value on our balance sheet. Depending on the
92
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
substance of the hedging purpose for our derivative instruments, we account for changes in the
fair value of some of them using cash-flow-hedge accounting pursuant to ASC 815 and of others by
recording the changes in fair value directly to current earnings (so-called economic hedges).
These accounting approaches and the various classes of risk that we are exposed to in our
business and the risk management systems using derivative instruments that we apply to these
risks are described below. See Note 9. Fair Value Measurement to our consolidated financial
statements for information about the techniques we use to measure the fair value of our
derivative instruments.
The following table presents the fair values of derivative instruments included in our
consolidated balance sheet as of December 26, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2009 |
|
|
|
Other Assets - |
|
|
Other Assets - |
|
|
Other Liabilities - |
|
|
Other Liabilities - |
|
|
|
Current |
|
|
Noncurrent |
|
|
Current |
|
|
Noncurrent |
|
Derivatives designated as hedging
instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
3,781 |
|
|
$ |
|
|
|
$ |
19,723 |
|
|
$ |
|
|
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
178 |
|
|
|
905 |
|
Total derivatives designated as hedging
instruments |
|
$ |
3,781 |
|
|
$ |
|
|
|
$ |
19,901 |
|
|
$ |
905 |
|
Derivatives not designated as hedging
instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
4,128 |
|
|
$ |
|
|
|
$ |
10,880 |
|
|
$ |
|
|
Total derivatives not designated as hedging
instruments |
|
$ |
4,128 |
|
|
$ |
|
|
|
$ |
10,880 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments |
|
$ |
7,909 |
|
|
$ |
|
|
|
$ |
30,781 |
|
|
$ |
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the amounts related to derivative instruments affecting our
consolidated statement of operations for the year ended December 26, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
|
|
|
|
|
|
|
|
(Loss) Recognized |
|
|
|
|
|
|
Amount of Gain |
|
|
|
in Other |
|
|
|
|
|
|
(Loss) Reclassified |
|
|
|
Comprehensive |
|
|
|
|
|
|
from Accumulated |
|
|
|
Income on |
|
|
Location of Gain |
|
|
Other Comprehensive |
|
|
|
Derivatives |
|
|
(Loss) Reclassified |
|
|
Income into Income |
|
|
|
Year Ended |
|
|
from Accumulated |
|
|
Year Ended |
|
|
|
December 26, |
|
|
Other Comprehensive |
|
|
December 26, |
|
Derivative Type |
|
2009 |
|
|
Income into Income |
|
|
2009 |
|
Derivatives designated as cash flow |
|
|
|
|
|
|
|
|
|
|
|
|
hedges under ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
(396 |
) |
|
Net sales |
|
$ |
(20,048 |
) |
Interest rate swaps |
|
|
294 |
|
|
Interest income (expense) |
|
|
(2,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as cash flow
hedges |
|
$ |
(102 |
) |
|
|
|
|
|
$ |
(23,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
93
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
|
|
(Loss) on |
|
|
|
|
Derivatives |
|
|
|
|
Recognized in |
|
|
|
|
Income |
|
|
|
|
Year Ended |
|
Location of Gain (Loss) |
|
|
December 26, |
|
Recognized in Income on |
|
|
2009 |
|
Derivatives |
Derivative Type |
|
|
|
|
|
|
Derivatives designated as cash flow hedges under ASC 815: |
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
(20,048 |
) |
|
Net sales |
Interest rate swaps |
|
$ |
(2,990 |
) |
|
Interest income (expense) |
Derivatives not designated as hedging instruments under
ASC 815: |
|
|
|
|
|
|
Foreign exchange forward contracts |
|
$ |
(9,870 |
) |
|
Other income (expense) |
Foreign exchange forward contracts |
|
$ |
1,844 |
|
|
Cost of sales |
Foreign exchange forward contracts |
|
$ |
(2,069 |
) |
|
Revenue |
Credit default swaps |
|
$ |
(1,459 |
) |
|
Other income (expense) |
Interest Rate Risk
We use interest rate swap agreements to mitigate our exposure to interest rate fluctuations
associated with certain of our debt instruments; we do not use such swap agreements for
speculative or trading purposes. We had interest rate swap contracts with a financial
institution that effectively converted to fixed rates the variable rate of the Euro Interbank
Offered Rate (Euribor) on the term loan portion of our credit facility with a consortium of
banks for the financing of our German plant. These swap contracts were required under the credit
facility agreement, which we repaid and terminated on June 30, 2009. Therefore, we terminated
these interest rate swap contracts on June 26, 2009 and consequently recognized an interest
expense of 1.7 million ($2.4 million at the balance sheet close rate on December 26, 2009 of
$1.44/1.00). The termination of the interest rate swap contracts settled on June 30, 2009. The
total notional value of the interest rate swaps was 39.1 million ($56.3 million at the balance
sheet close rate on December 26, 2009 of $1.44/1.00) on December 27, 2008. As of December 27,
2008, the weighted average interest rate for the interest rate swaps was 4.12%.
On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the
floating rate loans under our Malaysian credit facility, which became effective on September 30,
2009 with a notional value of 57.3 million ($82.5 million at the balance sheet close rate on
December 26, 2009 of $1.44/1.00) and pursuant to which we are entitled to receive a six-month
floating interest rate, the Euro Interbank Offered Rate (Euribor), and pay a fixed rate of
2.80%. The notional amount of the interest rate swap contract is scheduled to decline in
correspondence to our scheduled principal payments on the underlying hedged debt. This
derivative instrument qualifies for accounting as a cash flow hedge in accordance with FASB ASC
815, Derivatives and Hedging, and we designated it as such. We determined that our interest rate
swap contract was highly effective as a cash flow hedge at December 26, 2009.
Foreign Currency Exchange Risk
Cash Flow Exposure
We expect many of the components of our business to have material future cash flows,
including revenues and expenses that will be denominated in currencies other than the
components functional currency. Our primary cash flow exposures are customer collections and
vendor payments. Changes in the exchange rates between our components functional currencies and
the other currencies in which they transact will cause fluctuations in the cash flows we expect
to receive when these cash flows are realized or settled. Accordingly, we enter into foreign
94
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
exchange forward contracts to hedge the value of a portion of these forecasted cash flows. As of
December 26, 2009, these foreign exchange contracts hedge our forecasted future cash flows for
up to 18 months. These foreign exchange contracts qualified for accounting as cash flow hedges
in accordance with ASC 815, and we designated them as such. We initially report the effective
portion of the derivatives gain or loss in accumulated other comprehensive income (loss) and
subsequently reclassify amounts into earnings when the hedged transaction is settled. We
determined that these derivative financial instruments were highly effective as cash flow hedges
at December 26, 2009 and December 27, 2008. In addition, during 2009, we did not discontinue any
cash flow hedges because it was probable that a forecasted transaction would not occur.
During 2009 and 2008, we purchased foreign exchange forward contracts to hedge the exchange
risk on forecasted cash flows denominated in euro. As of December 26, 2009, the unrealized loss
on these contracts was $15.9 million and the total notional value of the contracts was 361.0
million ($519.8 million at the balance sheet close rate on December 26, 2009 of $1.44/1.00).
The weighted average forward exchange rate for these contracts was $1.40/1.00 at December 26,
2009. As of December 27, 2008, the unrealized loss of these forward contracts was $15.5 million
and the total notional value of the forward contracts was 625.1 million ($900.1 million at the
balance sheet close rate on December 26, 2009 of $1.44/1.00). The weighted average forward
exchange rate for these contracts was $1.37/1.00 at December 27, 2008.
We expect to reclassify $15.9 million of net unrealized losses related to these forward
contracts that are included in accumulated other comprehensive loss at December 26, 2009 to
earnings in the following 12 months as we realize the earnings effect of the related forecasted
transactions. The amount we ultimately record to earnings will be contingent upon the actual
exchange rate when we realize the related forecasted transaction. During 2009, we realized a
loss of $23.0 million related to our cash flow hedges.
Transaction Exposure
Many components of our business have assets and liabilities (primarily receivables,
investments, accounts payable, debt, solar module collection and recycling liabilities and
inter-company transactions) that are denominated in currencies other than the relevant entitys
functional currency. Changes in the exchange rates between our components functional currencies
and the currencies in which these assets and liabilities are denominated can create fluctuations
in our reported consolidated financial position, results of operations and cash flows. We may
enter into foreign exchange forward contracts or other financial instruments to hedge assets and
liabilities against the short-term effects of currency exchange rate fluctuations. The gains and
losses on the foreign exchange forward contracts will offset all or part of the transaction
gains and losses that we recognize in earnings on the related foreign currency assets and
liabilities.
Since our acquisition of the solar power project development business of OptiSolar on April
3, 2009, we have also become exposed to currency exchange rate fluctuations between the U.S.
dollar and Canadian dollar.
During 2009, we purchased foreign exchange forward contracts to hedge balance sheet
exposures related to transactions with third parties. We recognize gains or losses from the
fluctuation in foreign exchange rates and the valuation of these hedging contracts in cost of
sales and foreign currency gain (loss) on our consolidated statements of operations depending on
where the gain or loss from the hedged item is classified on our consolidated statement of
operations. As of December 26, 2009, the total unrealized loss on our foreign exchange forward
contracts was $6.8 million. These contracts have maturities of less than two months.
95
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of December 26, 2009, the total notional value of our foreign exchange forward contracts
was as follows (notional amounts and U.S. dollar equivalents in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet |
|
|
|
|
|
|
|
|
|
|
close rate on |
|
|
|
|
|
|
|
|
|
|
December 26, |
Transaction |
|
Currency |
|
Notional Amount |
|
U.S. Equivalent |
|
2009 |
Purchase |
|
Euro |
|
229.1 |
|
$ |
329.9 |
|
|
$1.44/1.00 |
Sell |
|
Euro |
|
109.9 |
|
$ |
158.3 |
|
|
$1.44/1.00 |
Sell |
|
U.S. dollar for Euro |
|
$27.2 |
|
$ |
27.2 |
|
|
n/a |
Purchase |
|
Malaysian ringgits |
|
MYR 104.5 |
|
$ |
30.3 |
|
|
$0.29/MYR1.00 |
Sell |
|
Malaysian ringgits |
|
MYR 22.8 |
|
$ |
6.6 |
|
|
$0.29/MYR1.00 |
Purchase |
|
Japanese yen |
|
JPY 275.0 |
|
$ |
2.8 |
|
|
$0.01/JPY1.00 |
Sell |
|
Japanese yen |
|
JPY 70.0 |
|
$ |
0.7 |
|
|
$0.01/JPY1.00 |
Purchase |
|
Canadian dollar |
|
CAD 108.4 |
|
$ |
103.0 |
|
|
$0.95/CAD1.00 |
Sell |
|
Canadian dollar |
|
CAD 120.1 |
|
$ |
114.1 |
|
|
$0.95/CAD1.00 |
Credit Risk
We have certain financial and derivative instruments that subject us to credit risk. These
consist primarily of cash, cash equivalents, investments, trade accounts receivable, interest
rate swap contracts and foreign exchange forward contracts. We are exposed to credit losses in
the event of nonperformance by the counterparties to our financial and derivative instruments.
We place cash, cash equivalents, investments, interest rate swap contracts and foreign exchange
forward contracts with various high-quality financial institutions and limit the amount of
credit risk from any one counterparty. We continuously evaluate the credit standing of our
counterparty financial institutions.
Note 9. Fair Value Measurement
On December 30, 2007, the beginning of our 2008 fiscal year, we adopted ASC 820, Fair Value
Measurements and Disclosures. ASC 820 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 initial adoption of ASC 820
was limited to our fair value measurements of financial assets and financial liabilities, as
permitted by ASC 820. On December 28, 2008, the beginning of our fiscal year 2009, we adopted
ASC 820 for the remainder of our fair value measurements. The implementation of the fair value
measurement guidance of ASC 820 did not result in any material changes to the carrying values of
our assets and liabilities.
ASC 820 defines fair value as the price that would be received from the sale of an asset or
paid to transfer a liability (an exit price) on the measurement date in an orderly transaction
between market participants in the principal or most advantageous market for the asset or
liability. ASC 820 specifies a hierarchy of valuation techniques, which is based on whether the
inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
|
|
|
Level 1 Valuation techniques in which all significant inputs are unadjusted quoted
prices from active markets for assets or liabilities that are identical to the assets or
liabilities being measured. |
|
|
|
|
Level 2 Valuation techniques in which significant inputs include quoted prices
from active markets for assets or liabilities that are similar to the assets or
liabilities being measured and/or quoted prices for assets or liabilities that are
identical or similar to the assets or liabilities being measured from markets that are
not active. Also, model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets are Level 2 valuation
techniques. |
96
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
|
|
|
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 at fair value on a recurring or on a one-time basis:
|
|
|
Cash equivalents. At December 26, 2009, our cash equivalents consisted of 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. |
|
|
|
|
Marketable securities. At December 26, 2009, our marketable securities consisted of
federal and foreign agency debt, supranational debt, corporate debt securities, foreign
government obligations and asset backed securities. We value our marketable securities
using quoted prices for securities with similar characteristics and other observable
inputs (such as interest rates that are observable at commonly quoted intervals), and
accordingly, we classify the valuation techniques that use these inputs as Level 2. We
also consider the effect of our counterparties credit standings in these fair value
measurements. |
|
|
|
|
Derivative assets and liabilities. At December 26, 2009, our derivative assets and
liabilities consisted of foreign exchange forward contracts involving major currencies
and interest rate swap contracts involving benchmark interest rates. Since our
derivative assets and liabilities are not traded on an exchange, we value them using
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. We consider the effect of our own credit standing and
that of our counterparties in our valuations of our derivative assets and liabilities. |
|
|
|
|
Module collection and recycling liability. We account for our obligation to collect
and recycle the solar modules that we sell in a similar manner to the accounting for
asset retirement obligations that is prescribed by ASC 410, Asset Retirement and
Environmental Obligations. When we sell solar modules, we initially record our liability
for collecting and recycling those particular solar modules at the fair value of this
liability, and then in subsequent periods, we accrete this fair value to the estimated
future cost of collecting and recycling the solar modules. Therefore, this is a one-time
nonrecurring fair value measurement of the collection and recycling liability associated
with each particular solar module sold. |
Since there is not an established market for collecting and recycling our solar modules, we
value our liability using a valuation model (an income approach). This fair value measurement
requires us to use significant unobservable inputs, which are primarily estimates of collection
and recycling process costs and estimates of future changes in costs due to inflation and future
currency exchange rates. Accordingly, we classify these valuation techniques as Level 3. We
estimate collection and recycling process costs based on analyses of the collection and
recycling technologies that we are currently developing; we estimate future inflation costs
based on analysis of historical trends; and we estimate future currency exchange rates based on
current rate information. We consider the effect of our own credit standing in our measurement
of the fair value of this liability.
97
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
At December 26, 2009 and December 27, 2008, information about inputs into the fair value
measurements of our assets and liabilities that we make on a recurring basis was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 26, 2009 |
|
|
|
|
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds |
|
$ |
395,431 |
|
|
$ |
395,431 |
|
|
$ |
|
|
|
$ |
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
78,911 |
|
|
|
|
|
|
|
78,911 |
|
|
|
|
|
Foreign agency debt |
|
|
168,963 |
|
|
|
|
|
|
|
168,963 |
|
|
|
|
|
Supranational debt |
|
|
71,050 |
|
|
|
|
|
|
|
71,050 |
|
|
|
|
|
Corporate debt securities |
|
|
115,248 |
|
|
|
|
|
|
|
115,248 |
|
|
|
|
|
Foreign government obligations |
|
|
10,128 |
|
|
|
|
|
|
|
10,128 |
|
|
|
|
|
Asset backed securities |
|
|
5,544 |
|
|
|
|
|
|
|
5,544 |
|
|
|
|
|
Derivative assets |
|
|
7,909 |
|
|
|
|
|
|
|
7,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
853,184 |
|
|
$ |
395,431 |
|
|
$ |
457,753 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
31,686 |
|
|
$ |
|
|
|
$ |
31,686 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 27, 2008 |
|
|
|
|
|
|
|
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 |
|
$ |
38,832 |
|
|
$ |
|
|
|
$ |
38,832 |
|
|
$ |
|
|
Money market mutual funds |
|
|
73,952 |
|
|
|
73,952 |
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency debt |
|
|
68,086 |
|
|
|
|
|
|
|
68,086 |
|
|
|
|
|
Foreign agency debt |
|
|
6,977 |
|
|
|
|
|
|
|
6,977 |
|
|
|
|
|
Corporate debt securities |
|
|
30,538 |
|
|
|
|
|
|
|
30,538 |
|
|
|
|
|
Derivative assets |
|
|
34,931 |
|
|
|
|
|
|
|
34,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
253,316 |
|
|
$ |
73,952 |
|
|
$ |
179,364 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
51,787 |
|
|
$ |
|
|
|
$ |
51,787 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
The carrying values and fair values of our financial instruments at December 26, 2009 and
December 27, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2009 |
|
December 27, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, current and noncurrent |
|
$ |
449,844 |
|
|
$ |
449,844 |
|
|
$ |
105,601 |
|
|
$ |
105,601 |
|
Notes receivable current |
|
$ |
50,531 |
|
|
$ |
50,531 |
|
|
$ |
|
|
|
$ |
|
|
Credit default swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
896 |
|
|
$ |
896 |
|
Foreign exchange forward contract assets |
|
$ |
7,909 |
|
|
$ |
7,909 |
|
|
$ |
34,035 |
|
|
$ |
34,035 |
|
Deposit with financial services company
(restricted investment) |
|
$ |
|
|
|
$ |
|
|
|
$ |
25,841 |
|
|
$ |
13,039 |
|
Restricted investments |
|
$ |
36,467 |
|
|
$ |
36,467 |
|
|
$ |
|
|
|
$ |
|
|
Investment in related party |
|
$ |
25,000 |
|
|
$ |
25,000 |
|
|
$ |
25,000 |
|
|
$ |
25,000 |
|
Notes receivable noncurrent |
|
$ |
25,241 |
|
|
$ |
25,332 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities |
|
$ |
174,958 |
|
|
$ |
178,900 |
|
|
$ |
198,470 |
|
|
$ |
204,202 |
|
Interest rate swaps |
|
$ |
1,083 |
|
|
$ |
1,083 |
|
|
$ |
1,377 |
|
|
$ |
1,377 |
|
Foreign exchange forward contract liabilities |
|
$ |
30,603 |
|
|
$ |
30,603 |
|
|
$ |
50,410 |
|
|
$ |
50,410 |
|
The carrying values on our balance sheet of our cash and cash equivalents, accounts
receivable, restricted cash, accounts payable, income tax payable and accrued expenses
approximate their fair values due to their short maturities; therefore, we exclude them from the
table above.
99
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
We estimated the fair value of our long-term debt in accordance with ASC 820 using a
discounted cash flows approach (an income approach) and we incorporated the credit risk of our
counterparty for asset fair value measurements and our credit risk for liability fair value
measurements.
Note 10. Related Party Transactions
In October 2008, we made an investment, at a total cost of $25.0 million, in the preferred
stock of a company based in the United States that supplies and installs solar power systems to
commercial and residential customers. This investment represents an ownership of approximately
11% of the voting interest in this company at December 26, 2009 and is our only equity interest
in that entity. Since our ownership interest in this company is less than 20% and we do not have
significant influence over it, we account for this investment using the cost method. We
performed a valuation assessment and have determined that the carrying value of this investment
equals the fair value at December 26, 2009. See Note 9. Fair Value Measurement to our
consolidated financial statements for information about the fair value measurement of our
investment in a related party.
In the fourth fiscal quarter of 2008, we also entered into a long-term solar module supply
agreement with this related party. During the year ended December 26, 2009, we recognized $18.5
million in net sales to this related party. At December 26, 2009 we had accounts receivable from
this related party of $7.0 million. During 2008, we did not have any material revenue
transactions with this related party.
Note 11. Notes Receivable
On April 8, 2009 we entered into a credit facility agreement with a solar project entity of
one of our customers for an available amount of 17.5 million ($25.2 million at the balance
sheet close rate on December 26, 2009 of $1.44/1.00) to provide financing for a photovoltaic
power generation facility. The credit facility replaced a bridge loan that we had made to this
entity. The credit facility bears interest at 8% per annum and is due on December 31, 2026. As
of December 26, 2009, this credit facility was fully drawn. The outstanding amount of this
credit facility has been included within Other assets noncurrent on our consolidated balance
sheets.
On April 21, 2009, we entered into a revolving VAT financing facility agreement for an
available amount of 9.0 million ($13.0 million at the balance sheet close rate on December 26,
2009 of $1.44/1.00) with the same solar project entity with which we entered into the credit
facility agreement on April 8, 2009. The VAT facility agreement pre-finances the amounts of
German value added tax (VAT) and any other tax obligations of similar nature during the
construction phase of the photovoltaic power generation facility. Borrowings under this facility
are short-term in nature, since the facility is repaid when VAT amounts are reimbursed by the
government. The VAT facility agreement bears interest at the rate of Euribor plus 1.2% and
matures on December 31, 2010. As of December 26, 2009 the balance on this credit facility was
1.4 million ($2.0 million at the balance sheet close rate on December 26, 2009 of $1.44/1.00).
The outstanding amount of this credit facility is included within Prepaid expenses and other
current assets on our consolidated balance sheets.
In October 2009, we entered into a fixed rate note with a solar power project entity to
finance construction and start-up costs of a photovoltaic facility in Germany. This note
provides funding in the amount of 19.2 million
($27.6 million at the balance sheet close rate on December 26, 2009 of $1.44/1.00). The fixed
rate note is due on May 31, 2010 and bears interest at 7% per annum. The fixed rate note is
collateralized by a bank account pledge agreement, a security assignment agreement, a
partnership interest pledge agreement and a share pledge agreement. The outstanding amount of
this financing agreement is included within Prepaid expenses and other current assets on our
consolidated balance sheets.
In October 2009, we entered into a fixed rate note with another solar power project entity
to finance construction and start-up costs of a photovoltaic facility in Germany. This note
provides funding in the amount of 14.5 million ($20.9 million at the balance sheet close rate
on December 26, 2009 of $1.44/1.00). The fixed rate note is due on May 31, 2010 and bears
interest at 7% per annum. This fixed rate note is collateralized by a bank
100
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
account pledge agreement, a security assignment agreement, a guarantee agreement and share
pledge agreement. The outstanding amount of this financing agreement is included within Prepaid
expenses and other current assets on our consolidated balance sheets.
Note 12. Solar Module Collection and Recycling Liability
Legislative initiatives in Europe hold manufacturers responsible for the collection and
recycling of certain electrical products. The legislation passed to date does not include solar
modules. However, based on our commitment to the environment, we have determined that we should
ensure the collection and recycling of the modules that we sell worldwide. As a result, we
include a solar module collection and recycling arrangement in our standard sales contracts.
Under this arrangement, we agree to provide for the collection and recycling of the materials in
our solar modules and the system owners agree to notify us, disassemble their solar power
systems, package the solar modules for shipment and revert ownership rights over the modules
back to us at the end of the modules service lives.
At the time of sale, we have recorded accrued collection and recycling liabilities for the
estimated fair value of our obligations for the collection and recycling of our solar modules
that we have sold and we have made associated charges to cost of sales. We based our estimate of
the fair value of our collection and recycling obligations on the present value of the expected
future cost of collecting and recycling the modules, which includes the cost of packaging the
modules for transport, the cost of freight from the module installation sites to a recycling
center and the material, labor, and capital costs of the recycling process. We based this
estimate on our experience collecting and recycling our solar modules and on our expectations
about future developments in recycling technologies and processes and about economic conditions
at the time the modules will be collected and recycled. In the periods between the time of our
sales and our settlement of the collection and recycling obligations, we accrete the carrying
amount of the associated liability by applying the discount rate used for its initial
measurement. We classify accretion expense as an other operating expense within selling, general
and administrative on our consolidated statement of operations.
Our module collection and recycling liabilities totaled $92.8 million at December 26, 2009
and $35.2 million at December 27, 2008. We charged $52.4 million, $22.2 million and $8.9 million
to cost of sales for the fair value of our collection and recycling obligation for modules sold
during the years ended December 26, 2009, December 27, 2008 and December 29, 2007, respectively.
The accretion expense on our collection and recycling obligations was $2.4 million, $0.9 million
and $0.3 million during the years ended December 26, 2009, December 27, 2008 and December 29,
2007, respectively.
101
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13. Debt
|
|
Our long-term debt at December 26, 2009 and December 27, 2008 consisted of the following (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
|
December 27, |
|
Type |
|
2009 |
|
|
2008 |
|
Malaysian Facility Agreement Fixed rate term loan |
|
$ |
84,166 |
|
|
$ |
66,975 |
|
Malaysian Facility Agreement Floating rate term loan(1) |
|
|
84,166 |
|
|
|
66,975 |
|
Director of Development of the State of Ohio |
|
|
9,994 |
|
|
|
11,694 |
|
Director of Development of the State of Ohio |
|
|
139 |
|
|
|
1,528 |
|
German Facility Agreement |
|
|
|
|
|
|
54,982 |
|
Capital lease obligations |
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
178,467 |
|
|
|
202,159 |
|
Less unamortized discount |
|
|
(3,509 |
) |
|
|
(3,689 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
|
174,958 |
|
|
|
198,470 |
|
Less current portion |
|
|
(28,559 |
) |
|
|
(34,951 |
) |
|
|
|
|
|
|
|
Noncurrent portion |
|
$ |
146,399 |
|
|
$ |
163,519 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We entered into an interest rate swap contract related to this loan. See Note 8. Derivative
Instruments to our consolidated financial statements. |
We did not have any short-term debt at December 26, 2009 and December 27, 2008.
Revolving Credit Facility
On September 4, 2009, we entered into a revolving credit facility pursuant to a Credit
Agreement among First Solar, Inc., certain designated Borrowing Subsidiaries (consisting of
First Solar Manufacturing GmbH, a German subsidiary, and other subsidiaries of our Company who
may in the future be designated as borrowers pursuant to the Credit Agreement) and several
lenders. JPMorgan Chase Bank, N.A. and Bank of America served as Joint-Lead Arrangers and
Bookrunners, with JPMorgan also acting as Administrative Agent. The Credit Agreement provides
First Solar, Inc. and the Borrowing Subsidiaries with a senior secured three-year revolving
credit facility in an aggregate available amount of $300.0 million, a portion of which is
available for letters of credit and swingline loans. Subject to certain conditions, we have the
right to request an increase in the aggregate commitments under the Credit Facility up to $400.0
million. In connection with the Credit Agreement, we also entered into a guarantee and
collateral agreement and foreign security agreements.
Borrowings under the Credit Agreement currently bear interest at (i) LIBOR (adjusted for
eurocurrency reserve requirements) plus a margin of 2.75% or (ii) a base rate as defined in the
Credit Agreement plus a margin of 1.75%, depending on the type of borrowing requested by us.
These margins are subject to adjustments depending on our consolidated leverage ratio and the
credit rating of the facility provided by Moodys Investors Service, Inc. and Standard and
Poors Rating Services.
At December 26, 2009, we had no borrowings outstanding and $46.0 million in letters of
credit drawn on the revolving credit facility, leaving approximately $254.0 million in capacity
available under the revolving credit facility, $29.0 million of which may be used for letters of
credit. As of December 26, 2009, based on applicable indices, the all-in effective three months
LIBOR borrowing rate was 3.47%.
In addition to paying interest on outstanding principal under the Credit Agreement, we are
required to pay a commitment fee currently at the rate of 0.375% per annum to the lenders based
on the average daily unutilized commitments under the facility. The commitment fee may also be
adjusted due to changes in our consolidated leverage ratio.
102
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
We will also pay a letter of credit fee equal to the applicable margin for eurocurrency
revolving loans on the face amount of each letter of credit and a fronting fee. Proceeds from
the credit facility may be used for working capital and other general corporate purposes.
The Credit Agreement contains various financial condition covenants which we must comply
with, including a debt to EBITDA ratio covenant, a minimum EBITDA covenant and a minimum
liquidity covenant. Under the Credit Agreement we are also subject to customary non-financial
covenants including limitations in secured indebtedness and limitations on dividends and other
restricted payments. We were in compliance with these covenants through December 26, 2009.
Malaysian Facility Agreement
On May 6, 2008, in connection with the plant expansion at our Malaysian manufacturing
center, First Solar Malaysia Sdn. Bhd. (FS Malaysia), our indirect wholly owned subsidiary,
entered into an export financing facility agreement (Malaysian Facility Agreement) with a
consortium of banks. The total available loan amount was 134.0 million ($193.0 million at the
balance sheet close rate on December 26, 2009 of $1.44/1.00). Pursuant to the Malaysian
Facility Agreement, we began semi-annual repayments of the principal balances of these credit
facilities during 2008. Amounts repaid under this credit facility cannot be re-borrowed. These
credit facilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
at |
|
|
|
|
|
|
|
|
|
|
|
December 26, |
|
Malaysian Borrowings |
|
Denomination |
|
|
Interest Rate |
|
Maturity |
|
2009 |
|
Fixed-rate euro-denominated term
loan |
|
EUR |
|
4.54% |
|
2016 |
|
$ |
84,166 |
|
Floating-rate euro-denominated term
loan |
|
EUR |
|
Euribor plus 0.55% |
|
2016 |
|
|
84,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
168,332 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
116.9 million outstanding at December 26, 2009 ($168.3 million at the balance sheet close
rate on December 26, 2009 of $1.44/1.00) |
At December 26, 2009, equipment with a net book value of $189.5 million was pledged as
collateral for these loans.
These credit facilities were used by FS Malaysia for the purpose of (1) partially financing
the purchase of certain equipment to be used at our Malaysian manufacturing center and (2)
financing fees to be paid to Euler-Hermes Kreditversicherungs-AG (Euler-Hermes), the German
Export Credit Agency of Hamburg, Federal Republic of Germany, which guarantees 95% of FS
Malaysias obligations related to the Malaysian credit facilities (Hermes Guaranty). In
addition, FS Malaysias obligations related to the Malaysian credit facilities are guaranteed,
on an unsecured basis, by First Solar, Inc., pursuant to a guaranty agreement.
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 credit facilities, First Solar, Inc. entered into a first demand
guaranty agreement dated May 6, 2008 in favor of the lenders. Thereby FS Malaysias obligations
related to the Malaysian Facility Agreement are guaranteed, on an unsecured basis, by First
Solar, Inc.
103
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In connection with the credit facilities, all of FS Malaysias obligations 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
Malaysian credit facilities, any payment claims of First Solar, Inc. against FS Malaysia are
subordinated to the claims of the lenders.
The Malaysian Facility Agreement contains various financial covenants with which we must
comply, such as debt to equity ratios, total leverage ratios, interest coverage ratios and debt
service coverage ratios. We must calculate and submit these ratios related to the financial
covenants for the first time at the end of fiscal 2009. The Malaysian Facility Agreement also
contains various customary non-financial covenants with which FS Malaysia must comply, including
submitting various financial reports and business forecasts to the lenders, maintaining adequate
insurance, complying with applicable laws and regulations, and restrictions on FS Malaysias
ability to sell or encumber assets or make loan guarantees to third parties. We were in
compliance with these covenants through December 26, 2009.
Certain of our indebtedness under the Malaysian credit facilities bears interest at rates
based on the Euro Interbank Offered Rate (Euribor). Euribor is the primary interbank lending
rate within the Euro zone, with maturities ranging from one week to one year. A disruption of
the credit environment could negatively impact interbank lending and therefore negatively impact
the Euribor rate. An increase in the Euribor rate would not impact our cost of borrowing under
the Malaysian Facility Agreement as we entered into an interest rate swap agreement to mitigate
such ris