First Solar (FSLR)

The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the nine months ended September 26, 2009 are not necessarily indicative of the results that may be expected for the year ending December 26, 2009, or for any other period. The balance sheet at December 27, 2008 presented in these financial statements has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and accompanying notes should be read in conjunction with the financial statements and notes thereto for the year ended December 27, 2008 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

We report our results of operations using a 52 or 53 week fiscal year, which ends on the Saturday on or before December 31. Our fiscal quarters end on the Saturday closest to the end of the applicable calendar quarter. Fiscal 2009 will end on December 26, 2009 and will consist of 52 weeks.

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

Note 2. Summary of Significant Accounting Policies>

These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and notes thereto for the year ended December 27, 2008 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. Our significant accounting policies reflect the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 805, Business Combinations, in the second quarter of fiscal 2009.

During the third quarter of fiscal 2009, we adopted the provisions of ASC 976, Accounting for Sales of Real Estate for certain solar power projects.

Note 3. Recent Accounting Pronouncements>

In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets- an amendment of SFAS 140. This standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures in order to enhance information to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years ended after November 15, 2009. We do not expect that the adoption of SFAS 166 will have a material impact on our financial position, results of operations or cash flows.

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R). This standard changes the consolidation analysis for variable interest entities. SFAS 167 is effective for fiscal years ending after November 15, 2009. We do not expect that the adoption of SFAS 167 will have a material impact on our financial position, results of operations or cash flows.

In September 2009, the FASB issued FASB Accounting Standards Codification Update (ASU) 2009-05, 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. We do not expect that the adoption of ASU 2009-05 will have a material impact on our financial position, results of operations or cash flows.

 

 

                                          

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In September 2009, the FASB issued ASU 2009-06, 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 tax payments made by an entity attributable to the entity or attributable to the owners. In addition, ASU 2009-06 clarifies management’s 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, 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, a best estimate of the selling price is required to separate deliverables and to allocate the arrangement consideration. 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.

Note 4. Acquisition

 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 September 26, 2009, 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.

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 September 26, 2009, 333,932 Holdback Shares had been issued to OptiSolar Holdings, with 331,523 Holdback Shares issued during the three months ended September 26, 2009. The estimated fair value of this contingent consideration was $2.8 million at September 26, 2009 (relating to 21,164 Holdback Shares remaining to be issued as of such date) and $47.7 million on April 3, 2009 (relating to 355,096 Holdback Shares to be issued as of such date), 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			43,600
Deferred tax liability			(8,405	)
Goodwill			250,176
Total purchase consideration		$	399,434

 

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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. We adjusted goodwill downward during the third quarter of 2009 by $11.0 million as additional information relating to deferred tax assets became available. We have allocated $248.8 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 OptiSolar’s 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 not commercially viable; as of September 26, 2009, we had not yet reached the point of sale for any of the projects in the portfolio we acquired from OptiSolar. Therefore, 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.

   Note 5. 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. At September 26, 2009 and December 27, 2008, the carrying amount of this goodwill was $33.8 million.

 

 

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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, which primarily represents the synergies and economies of scale expected from acquiring OptiSolar’s project pipeline and using our solar modules in the acquired projects. During the three months ended September 26, 2009, we adjusted goodwill downward by $11.0 million as additional information regarding deferred tax assets became available. We have allocated $248.8 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 September 26, 2009, the carrying amount of this goodwill was $250.2 million. See Notes 4 and 20 to our condensed consolidated financial statements for additional information about this acquisition.

The changes in the carrying amount of goodwill for the nine months ended September 26, 2009 were as follows (in thousands):

		Components				Other				Consolidated
Beginning balance, December 27, 2008		$	—			$	33,829			$	33,829
Goodwill from 2009 acquisitions			259,722				1,411				261,133
Goodwill adjustment (1)			(10,957	)		$	—				(10,957	)
Ending balance, September 26, 2009		$	248,765			$	35,240			$	284,005

(1)	The goodwill adjustment was 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 tests in the fourth fiscal quarter of the year ended December 27, 2008. Based on that 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, and since the April 3, 2009 OptiSolar acquisition, that would trigger an interim goodwill impairment test.

 
 

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 are being amortized was as follows (in thousands):

		As of September 26, 2009												As of December 27, 2008
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Value				Gross Carrying Amount				Accumulated Amortization				Net Carrying 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

Amortization expense for acquisition-related intangible assets was immaterial for the three months ended September 26, 2009 and was $0.2 million for the nine months ended September 26, 2009. Amortization expense for acquisition-related intangible assets was $22,000 for the three months ended September 27, 2008 and $0.1 million for the nine months ended September 27, 2008.

Project Assets

In connection with the acquisition of the solar power project development business of OptiSolar, we measured at fair value certain project assets based on the varying development stages of each project asset on the acquisition date. We will expense these projects assets as each respective solar power project is sold to a customer, constructed for a customer or if we determine that the project is not commercially viable. See also Note 8 to our condensed consolidated financial statements about balances for project assets.

 

 

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Note 6. Cash and Investments

Cash, cash equivalents and marketable securities consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Cash and cash equivalents:
Cash		$	136,477			$	603,434
Cash equivalents:
Federal agency debt			—				38,832
Money market mutual fund			228,337				73,952
Total cash and cash equivalents			364,814				716,218
Marketable securities:
Federal agency debt			124,390				68,086
Foreign agency debt			144,590				6,977
Supranational debt			71,240				—
Corporate debt securities			114,926				30,538
Foreign government obligations			10,116				—
Total marketable securities			465,262				105,601
Total cash, cash equivalents and marketable securities		$	830,076			$	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 three months ended September 26, 2009, we did not realize any gains or losses on our marketable securities. During the nine months ended September 26, 2009, we realized an immaterial amount in gains and did not realize any losses on our marketable securities. During the three and nine months ended September 27, 2008, we realized $0.2 million and $0.6 million in gains and $0.3 million and $0.4 million in losses, respectively, on our marketable securities. See Note 10 to our condensed consolidated financial statements for information about the fair value measurement of our marketable securities.

All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable debt security to be impaired when its fair value is less than its carrying cost, in which case we would further review the investment to determine whether it is other-than-temporarily impaired. When we evaluate an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more likely than not we will be required to sell the investment before we have recovered its cost basis. If an investment is other-than-temporarily impaired, we write it down through earnings to its impaired value and establish that as a new cost basis for the investment. We did not identify any of our marketable securities as other-than-temporarily impaired at September 26, 2009.

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 September 26, 2009
Security Type		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Federal agency debt		$	124,179			$	211			$	—			$	124,390
Foreign agency debt			144,051				539				—				144,590
Supranational debt			71,052				273				85				71,240
Corporate debt securities			114,395				572				41				114,926
Foreign government obligations			10,066				50				—				10,116
Total		$	463,743			$	1,645			$	126			$	465,262

		As of December 27, 2008
Security Type		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair 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

 

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Contractual maturities of our available-for-sale marketable securities as of September 26, 2009 and December 27, 2008 were as follows (in thousands):

		As of September 26, 2009
Maturity		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
One year or less		$	158,515			$	349			$	17			$	158,847
One year to two years			221,546				998				109				222,435
Two years to three years			83,682				298				—				83,980
Total		$	463,743			$	1,645			$	126			$	465,262

		As of December 27, 2008
Maturity		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair 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

The net unrealized gain of $1.5 million and $0.4 million as of September 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 September 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 September 26, 2009
		In Loss Position for Less Than 12 Months								In Loss Position for 12 Months or Greater								Total
Security Type		Estimated Fair Value				Gross Unrealized Losses				Estimated Fair Value				Gross Unrealized Losses				Estimated Fair Value				Gross Unrealized Losses
Supranational debt		$	27,214			$	85			$	—			$	—			$	27,214			$	85
Corporate debt securities			3,018				41				—				—				3,018				41
Total		$	30,232			$	126			$	—			$	—			$	30,232			$	126

		As of December 27, 2008
		In Loss Position for Less Than 12 Months								In Loss Position for 12 Months or Greater								Total
Security Type		Estimated Fair Value				Gross Unrealized Losses				Estimated Fair Value				Gross Unrealized Losses				Estimated Fair Value				Gross Unrealized Losses
Federal agency debt		$	6,977			$	13			$	—			$	—			$	6,977			$	13
Corporate debt securities			9,088				16				—				—				9,088				16
Total		$	16,065			$	29			$	—			$	—			$	16,065			$	29

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Note 7. Restricted Cash and Investments

Restricted cash and investments consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Restricted cash		$	38			$	4,218
Restricted investments			37,135				—
Deposit with financial services company			—				25,841
Total restricted cash and investments		$	37,173			$	30,059
Restricted cash and investments — current		$	—			$	—
Restricted cash and investments — noncurrent		$	37,173			$	30,059

At September 26, 2009, our restricted investments consisted of long-term marketable securities that we hold to fund future costs of our solar module collection and recycling program.

 

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 September 26, 2009
Security Type		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U.S. government obligations		$	775			$	41			$	—			$	816
Foreign government obligations			34,693				1,626				—				36,319
Total		$	35,468			$	1,667			$	—			$	37,135

As of September 26, 2009, the contractual maturities of these available-for-sale marketable securities were between 18 and 26 years.

Note 8. Consolidated Balance Sheet Details>

Accounts receivable, net

Accounts receivable, net consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Accounts receivable, gross		$	352,955			$	61,703
Allowance for doubtful account			(3,990	)			—
Accounts receivable, net		$	348,965			$	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 and due to higher volumes shipped during the three months ended September 26, 2009.

During the three months ended September 26, 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 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 will be applied to reduce outstanding accounts receivable balances. During the three months ended September 26, 2009 we extended rebates to customers in the amount of €48.7 million ($71.5 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) which reduced our accounts receivable from these customers by such amount at September 26, 2009.

 

During the three months ended June 27, 2009, we provided an allowance  for the doubtful account receivable in the amount of $7.0 million due to the collectability of the outstanding accounts receivable from a specific customer. During the three months ended September 26, 2009 we collected $3.0 million of the overdue accounts receivable balance from this specific customer and reduced our allowance for the doubtful account accordingly.

 

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Inventories

Inventories consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Raw materials		$	119,400			$	103,725
Work in process			10,627				4,038
Finished goods			59,439				13,791
Total inventories		$	189,466			$	121,554
Inventory — current		$	178,032			$	121,554
Inventory — noncurrent (1)		$	11,434			$	—

(1)	Inventory – noncurrent represents raw materials.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Prepaid expenses		$	6,280			$	6,699
Prepaid supplies			10,696				12,556
Capitalized equipment spares			13,998				12,900
Derivative instruments — current			8,727				34,931
Other receivable from financial institution			—				10,764
Note receivable — current  (see Note 12)			8,574				—
Deferred project costs			3,457				710
Other taxes receivable			6,992				2,763
Accrued interest income			4,880				1,511
Other customer receivable			2,936				—
Other current assets			12,815				8,460
Total prepaid expenses and other current assets		$	79,355			$	91,294

Project Assets – Current and Noncurrent

Project assets – current and noncurrent consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Project assets acquired		$	103,888			$	—
Project assets — land			8,232				—
Project assets — other			48,589				—
Total project assets		$	160,709			$	—
Total project assets — current		$	58,017			$	—
Total project assets — noncurrent		$	102,692			$	—

Project assets consist primarily of costs capitalized relating to solar power projects in various stages of development. They include  costs for land and costs for developing a solar power project, including legal, consulting, permitting and other costs. 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 the development of these projects, which we capitalized. We expense these project assets as each respective solar power project is sold to a customer, constructed for a customer or if we determine that the project is not commercially viable. See also Note 5 to our condensed consolidated financial statements.

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Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Buildings and improvements		$	221,272			$	137,116
Machinery and equipment			789,420				559,566
Office equipment and furniture			31,077				22,842
Leasehold improvements			15,010				11,498
Depreciable property, plant and equipment, gross			1,056,779				731,022
Accumulated depreciation			(189,907	)			(100,939	)
Depreciable property, plant and equipment, net			866,872				630,083
Land			5,032				5,759
Construction in progress			90,828				206,780
Property, plant and equipment, net		$	962,732			$	842,622

Depreciation of property, plant and equipment was $33.7 million and $16.9 million for the three months ended September 26, 2009 and September 27, 2008, respectively, and was $88.0 million and $40.4 million for the nine months ended September 26, 2009 and September 27, 2008, respectively.

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 three and nine months ended September 26, 2009 and September 27, 2008 (in thousands):

		Three Months Ended								Nine Months Ended
		September 26, 2009				September 27, 2008				September 26, 2009				September 27, 2008
Interest cost incurred		$	2,367			$	2,267			$	9,473			$	5,079
Interest cost capitalized – property, plant and equipment			(665	)			(2,140	)			(3,009	)			(4,948	)
Interest cost capitalized – project assets			(1,613	)			—				(1,613	)			—
Interest expense, net		$	89			$	127			$	4,851			$	131

Accrued expenses

Accrued expenses consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Product warranty liability — current portion		$	7,667			$	4,040
Accrued compensation and benefits			36,607				32,145
Accrued property, plant and equipment			31,242				44,115
Accrued inventory			23,541				31,438
Accrued utilities and plant services			5,051				5,100
Accrued subcontractor services and materials			11,461				2,934
Accrued freight and warehouse charges			5,118				2,549
Accrued interest			2,468				2,008
Accrued taxes — other			3,020				6,182
Other accrued expenses			16,315				10,388
Total accrued expenses		$	142,490			$	140,899

 

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Other current liabilities

Other current liabilities consisted of the following at September 26, 2009 and December 27, 2008 (in thousands):

		September 26, 2009				December 27, 2008
Derivative instruments — current		$	57,073			$	50,733
Deferred revenue			5,290				—
Billings in excess of costs and estimated earnings			1,711				2,159
Other tax payable			2,442				6,614
Other payable to financial institution (1)			9,913				—
Other current liabilities			8,679				232
Total other current liabilities		$	85,107			$	59,738

(1)	Settled subsequent to September 26, 2009.

 

 

Note 9. 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 FASB ASC 815, Derivatives and Hedging, we report all of our derivative instruments at fair value on our balance sheet. Depending on the substance of the hedging purpose for our derivative instruments, we account for changes in the fair value of some of them using cash-flow-hedge accounting pursuant to ASC 815 and of others by recording the changes in fair value directly to current earnings (so-called “economic hedges”). These accounting approaches and the various classes of risk that we are exposed to in our business and the risk management systems using derivative instruments that we apply to these risks are described below. See Note 10 to our condensed 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 condensed consolidated balance sheet as of September 26, 2009 (in thousands):

		September 26, 2009
		Other Assets - Current				Other Assets - Noncurrent				Other Liabilities - Current				Other Liabilities - Noncurrent
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange forward contracts		$	—			$	—			$	51,155			$	815
Interest rate swap contracts			—				—				90				1,014
Total derivatives designated as hedging instruments		$	—			$	—			$	51,245			$	1,829
Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange forward contracts		$	8,727			$	—			$	5,828			$	—
Total derivatives not designated as hedging instruments		$	8,727			$	—			$	5,828			$	—
Total derivative instruments		$	8,727			$	—			$	57,073			$	1,829

 

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The following tables present the amounts related to derivative instruments affecting our condensed consolidated statement of operations for the three and nine months ended September 26, 2009 (in thousands):

		Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives									Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Derivative Type		Three Months Ended September 26, 2009				Nine Months Ended September 26, 2009			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income		Three Months Ended September 26, 2009				Nine Months Ended September 26, 2009
Derivatives designated as cash flow hedges under ASC 815:
Foreign exchange forward contracts		$	(9,313	)		$	(36,424	)	Net sales		$	(22,939	)		$	8,885
Interest rate swaps			(820	)			273		Interest income (expense)			(102	)			(2,627	)
Total derivatives designated as cash flow hedges		$	(10,133	)		$	(36,151	)			$	(23,041	)		$	6,258

 

 

 

		Amount of Gain (Loss) on Derivatives Recognized in Income
Derivative Type		Three Months Ended September 26, 2009				Nine Months Ended September 26, 2009			Location of Gain (Loss) Recognized in Income on Derivatives
Derivatives designated as cash flow hedges under ASC 815:
Foreign exchange forward contracts		$	(22,939	)		$	8,885		Net sales
Interest rate swaps		$	(102	)		$	(2,627	)	Interest income (expense)
Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange forward contracts		$	(495	)		$	(5,426	)	Other income (expense)
Foreign exchange forward contracts		$	2,028			$	3,097		Cost of sales
Credit default swaps		$	—			$	(1,459	)	Other income (expense)

 

 

Page | 16

 

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 ($2.5 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). The termination of the interest rate swap contracts settled on June 30, 2009.

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 ($84.2 million at the balance sheet close rate on September 26, 2009 of $1.47/€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 September 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 component’s functional currency. Our primary cash flow exposures are customer collections and vendor payments. Changes in the exchange rates between our components’ functional currencies and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge the value of a portion of these forecasted cash flows. As of September 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 derivative’s gain or loss in accumulated other comprehensive income (loss) and subsequently reclassify amounts into earnings when the hedged transaction is settled. We determined that these derivative financial instruments were highly effective as cash flow hedges at September 26, 2009. In addition, during the nine months ended September 26, 2009, we did not discontinue any cash flow hedges because it was probable that a forecasted transaction would not occur.

In 2008 and during the nine months ended September 26, 2009, we purchased foreign exchange forward contracts to hedge the exchange risk on forecasted cash flows denominated in euro. As of September 26, 2009, the unrealized loss on these contracts was $52.0 million and the total notional value of the contracts was €499.5 million ($734.3 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). The weighted average forward exchange rate for these contracts was $1.36/€1.00 at September 26, 2009.

We expect to reclassify $51.2 million of net unrealized losses related to these forward contracts that are included in accumulated other comprehensive loss at September 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.

Page | 17

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 balances) that are denominated in currencies other than their functional currencies. Changes in the exchange rates between our components’ functional currencies and the currencies in which these assets and liabilities are denominated can create fluctuations in our reported consolidated financial position, results of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to hedge these assets and liabilities against the short-term effects of currency exchange rate fluctuations. The gains and losses on the foreign exchange forward contracts will offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency assets and liabilities.

During the nine months ended September 26, 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.

As of September 26, 2009, the total notional value of our foreign exchange forward contracts to purchase and sell euros with/for U.S. dollars was €225.9 million and €198.9 million, respectively ($332.1 million and $292.4 million, respectively, at the balance sheet close rate on September 26, 2009 of $1.47/€1.00); the total notional value of our foreign exchange forward contracts to purchase and sell U.S. dollars with/for euros was $20.8 million and $38.7 million, respectively; the total notional value of our foreign exchange forward contracts to purchase and sell Malaysian ringgits with/for U.S. dollars was MYR 128.2 million and MYR 30.0 million, respectively ($37.2 million and $8.7 million, respectively, at the balance sheet close rate on September 26, 2009 of $0.29/MYR1.00); and the total notional value of our foreign exchange forward contracts to purchase and sell Canadian dollars with/for U.S. dollars was CAD 5.7 million and CAD 22.1 million, respectively ($5.2 million and $20.1 million, respectively, at the balance sheet close rate on September 26, 2009 of $0.91/CAD1.00). As of September 26, 2009, the total unrealized gain on these contracts was $2.9 million. These contracts have maturities of less than two months.

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.

Page | 18

Note 10. 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.

•

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 one-time basis:

•

Cash equivalents.  At September 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 September 26, 2009, our marketable securities consisted of federal and foreign agency debt, supranational debt, corporate debt securities and foreign government obligations. 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 September 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, foreign exchange rates and credit default swap spreads 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.

•

Product 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.

 

Page | 19

 

At September 26, 2009, information about inputs into the fair value measurements of our assets and liabilities that we make on a recurring basis was as follows (in thousands):

						Fair Value Measurements at Reporting Date Using
		Total Fair Value and Carrying Value on Our Balance Sheet				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents:
Money market mutual funds		$	228,337			$	228,337			$	—			$	—
Marketable securities:
Federal agency debt			124,390				—				124,390				—
Foreign agency debt			144,590				—				144,590				—
Supranational debt			71,240				—				71,240				—
Corporate debt securities			114,926				—				114,926				—
Foreign government obligations			10,116				—				10,116				—
Derivative assets			8,727				—				8,727				—
Total assets		$	702,326			$	228,337			$	473,989			$	—
Liabilities:
Derivative liabilities		$	58,902			$	—			$	58,902			$	—

Fair Value of Financial Instruments

The carrying values and fair values of our financial instruments at September 26, 2009 and December 27, 2008 were as follows (in thousands):

		September 26, 2009								December 27, 2008
		Carrying Value				Fair Value				Carrying Value				Fair Value
Assets:
Marketable securities, current and noncurrent		$	465,262			$	465,262			$	105,601			$	105,601
Note receivable — current		$	8,574			$	8,574			$	—			$	—
Credit default swaps		$	—			$	—			$	896			$	896
Foreign exchange forward contract assets		$	8,727			$	8,727			$	34,035			$	34,035
Deposit with financial services company (restricted investment)		$	—			$	—			$	25,841			$	13,039
Restricted  investments		$	37,135			$	37,135			$	—			$	—
Investment in related party		$	25,000			$	25,000			$	25,000			$	25,000
Note receivable — noncurrent		$	25,721			$	25,818			$	—			$	—
Liabilities:
Long-term debt, including current maturities		$	192,489			$	199,337			$	198,470			$	204,202
Interest rate swaps		$	1,104			$	1,104			$	1,377			$	1,377
Foreign exchange forward contract liabilities		$	57,798			$	57,798			$	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.

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 incorporated the credit risk of our counterparty for asset fair value measurements and our credit risk for liability fair value measurements.

 

 

Page | 20

Note 11.  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 solar power plants to commercial and residential customers. This investment represents an ownership of approximately 12% of the voting interest in this company at September 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.

In the fourth fiscal quarter of 2008, we also entered into a long-term solar module supply agreement with this related party. During the three and nine months ended September 26, 2009, we recognized $4.0 million and $8.2 million, respectively, in net sales to this related party. At September 26, 2009 we had accounts receivable from this related party of $2.6 million.

Note 12.  Notes Receivable

On April 8, 2009 we entered into a credit facility agreement with a solar project entity of one of our customers for an available amount of €17.5 million ($25.7 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) to provide financing for a photovoltaic power generation facility. The credit facility replaced a bridge loan that we had made to this customer. The credit facility bears interest at 8% per annum and is due on December 31, 2026. As of September 26, 2009, this credit facility was fully drawn. The outstanding amount of this credit facility has been included within Other assets – noncurrent on our condensed consolidated balance sheets.

On April 21, 2009, we entered into a revolving VAT financing facility agreement for an available amount of €9.0 million ($13.2 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) with the same solar project entity with whom 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 September 26, 2009 the balance on this credit facility was €5.8 million ($8.5 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). The outstanding amount of this credit facility is included within Prepaid expenses and other current assets on our condensed consolidated balance sheets.

On June 30, 2009, the available amount under the VAT facility agreement was increased to €15.0 million ($22.1 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). This increase was only temporary and the amounts available under the facility reverted back to the original amounts on August 31, 2009.

Note 13. Debt>

Our long-term debt at September 26, 2009 and December 27, 2008 consisted of the following (in thousands):

Type		September 26, 2009				December 27, 2008
Malaysian Facility Agreement – Fixed rate term loan		$	92,786			$	66,975
Malaysian Facility Agreement – Floating rate term loan (1)			92,786				66,975
Director of Development of the State of Ohio			10,280				11,694
Director of Development of the State of Ohio			417				1,528
German Facility Agreement			—				54,982
Capital lease obligations			2				5
			196,271				202,159
Less unamortized discount			(3,782	)			(3,689	)
Total long-term debt			192,489				198,470
Less current portion			(29,169	)			(34,951	)
Noncurrent portion		$	163,320			$	163,519

(1)	We entered into an interest rate swap contract related to this loan. See Note 9 to our condensed consolidated financial statements.

We did not have any short-term debt at September 26, 2009 and December 27, 2008.

 

Page | 21

 

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 the Company’s consolidated leverage ratio and the credit rating of the facility provided by Moody’s Investors Service, Inc. and Standard and Poor’s Rating Services. 

At September 26, 2009, we had no borrowings outstanding and $14.0 million in letters of credit drawn on the revolving credit facility, leaving approximately $286.0 million in capacity available under the revolving credit facility, $61.0 million of which may be used for letters of credit. As of this date, based on the indices, the all-in effective three months LIBOR borrowing rate was 3.51%. 

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 in respect of the average daily unutilized commitments thereunder. The commitment fee may also be adjusted due to changes in the consolidated leverage ratio.

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 with respect to a debt to EBITDA ratio, minimum EBITDA and minimum liquidity. 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 September 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 IKB Deutsche Industriebank AG (IKB), as arranger, NATIXIS Zweigniederlassung Deutschland (NZD), as facility agent and original lender, AKA Ausfuhrkredit-Gesellschaft mbH (AKA), as original lender, and NATIXIS Labuan Branch (NLB), as security agent. The total available loan amount was €134.0 million ($197.0 million at the balance sheet close rate on September 26, 2009 of $1.47/€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. These credit facilities consisted of the following (in thousands):

Malaysian Borrowings

Denomination

Interest

Maturity

Outstanding at September 26, 2009

Fixed-rate euro-denominated term loan

EUR

4.54%

2016

$

92,786

Floating-rate euro-denominated term loan

EUR

Euribor plus 0.55%

2016