e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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20-4623678 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
4050 East Cotton Center Boulevard, Building 6, Suite 68
Phoenix, Arizona 85040
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
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 number of shares of the registrants common stock, par value $0.001, outstanding as of
August 1, 2007 was 72,997,929 shares.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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July 1, |
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June 30, |
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July 1, |
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June 30, |
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2006 |
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2007 |
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2006 |
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2007 |
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Net sales |
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$ |
27,861 |
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$ |
77,223 |
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$ |
41,485 |
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$ |
144,172 |
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Cost of sales |
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18,761 |
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48,852 |
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29,113 |
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85,759 |
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Gross profit |
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9,100 |
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28,371 |
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12,372 |
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58,413 |
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Operating expenses: |
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Research and development |
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1,536 |
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3,763 |
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3,055 |
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6,821 |
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Selling, general and administrative |
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8,133 |
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17,285 |
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14,005 |
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30,975 |
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Production start up |
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4,062 |
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1,523 |
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6,641 |
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9,997 |
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Total operating expenses |
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13,731 |
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22,571 |
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23,701 |
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47,793 |
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Operating income (loss) |
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(4,631 |
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5,800 |
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(11,329 |
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10,620 |
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Foreign currency gain (loss) |
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2,190 |
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21 |
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3,090 |
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(249 |
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Interest expense |
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(285 |
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(1,283 |
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(708 |
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(1,484 |
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Other income (expense), net |
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242 |
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3,326 |
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591 |
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7,286 |
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Income (loss) before income taxes |
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(2,484 |
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7,864 |
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(8,356 |
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16,173 |
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Income tax benefit |
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23 |
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36,554 |
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33,273 |
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Net income (loss) |
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$ |
(2,461 |
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$ |
44,418 |
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$ |
(8,356 |
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$ |
49,446 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.05 |
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$ |
0.61 |
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$ |
(0.16 |
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$ |
0.68 |
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Diluted |
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$ |
(0.05 |
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$ |
0.58 |
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$ |
(0.16 |
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$ |
0.65 |
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Weighted-average number of shares
used in per share calculations: |
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Basic |
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54,358 |
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72,596 |
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52,567 |
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72,472 |
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Diluted |
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54,358 |
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76,089 |
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52,567 |
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75,740 |
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See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
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December 30, |
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June 30, |
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2006 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
308,092 |
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$ |
107,799 |
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Short-term investments |
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323 |
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207,208 |
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Accounts receivable, net |
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27,123 |
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13,736 |
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Inventories |
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16,510 |
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26,848 |
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Economic development funding receivable |
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27,515 |
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33,757 |
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Deferred tax asset, net current |
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4,816 |
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Prepaid expenses and other current assets |
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8,959 |
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29,923 |
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Total current assets |
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388,522 |
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424,087 |
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Property, plant and equipment, net |
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178,868 |
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245,559 |
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Restricted investments |
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8,224 |
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14,023 |
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Deferred tax asset, net noncurrent |
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34,403 |
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Other noncurrent assets |
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2,896 |
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5,140 |
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Total assets |
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$ |
578,510 |
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$ |
723,212 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Short-term debt |
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$ |
16,339 |
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$ |
22,407 |
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Current portion of long-term debt |
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3,311 |
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3,327 |
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Accounts payable and accrued expenses |
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32,083 |
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51,394 |
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Other current liabilities |
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340 |
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15 |
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Total current liabilities |
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52,073 |
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77,143 |
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Accrued recycling |
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3,724 |
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6,448 |
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Long-term debt |
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61,047 |
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96,477 |
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Other noncurrent liabilities |
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1,134 |
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Total liabilities |
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116,844 |
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181,202 |
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Commitments and contingencies
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Employee stock options on redeemable shares |
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50,226 |
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60,706 |
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Stockholders equity: |
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Common stock, $0.001 par value per
share; 500,000,000 shares authorized;
72,997,929 and 72,331,964 shares issued and
outstanding at June 30, 2007 and December 30,
2006, respectively |
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72 |
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73 |
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Additional paid-in capital |
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555,749 |
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575,047 |
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Accumulated deficit |
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(145,403 |
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(96,013 |
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Accumulated other comprehensive income |
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1,022 |
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2,197 |
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Total stockholders equity |
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411,440 |
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481,304 |
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Total liabilities and stockholders equity |
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$ |
578,510 |
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$ |
723,212 |
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See accompanying notes to these condensed consolidated financial statements.
4
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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July 1, |
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June 30, |
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2006 |
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2007 |
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Cash flows from operating activities: |
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Cash received from customers |
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$ |
31,444 |
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$ |
157,616 |
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Cash paid to suppliers and employees |
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(40,790 |
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(118,742 |
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Interest, net of amounts capitalized |
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156 |
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6,413 |
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Income tax |
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(19,253 |
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Other |
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53 |
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(699 |
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Net cash provided by (used in) operating activities |
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(9,137 |
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25,335 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(67,804 |
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(80,388 |
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Deposits |
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(3,229 |
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Purchase of marketable securities |
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(238,855 |
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Proceeds from maturities and sales of marketable securities |
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40,254 |
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Purchases of restricted investments |
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(1,652 |
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(5,708 |
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Other investments in long-term assets |
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(5 |
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Net cash used in investing activities |
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(69,461 |
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(287,926 |
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Cash flows from financing activities: |
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Proceeds from notes payable to a related party |
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10,000 |
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Repayment of notes payable to a related party |
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(30,000 |
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Repayment of long-term debt |
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(1,648 |
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Equity contributions |
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30,000 |
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Proceeds from stock options exercised |
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100 |
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2,836 |
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Proceeds from debt |
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73,260 |
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41,256 |
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Excess tax benefit from share-based compensation arrangements |
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14,026 |
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Proceeds from economic development funding |
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4,817 |
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Other financing activities |
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10 |
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(2 |
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Net cash provided by financing activities |
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83,370 |
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61,285 |
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Effect of exchange rate changes on cash and cash equivalents |
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(98 |
) |
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1,013 |
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Net increase (decrease) in cash and cash equivalents |
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4,674 |
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(200,293 |
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Cash and cash equivalents, beginning of the period |
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16,721 |
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308,092 |
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Cash and cash equivalents, end of the period |
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$ |
21,395 |
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$ |
107,799 |
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Supplemental disclosure of significant non-cash investing and
financing activities: |
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Property, plant and equipment acquisitions funded by liabilities |
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$ |
8,476 |
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$ |
7,743 |
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Non-cash conversion of debt and accrued interest to equity |
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$ |
74,000 |
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$ |
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See accompanying notes to these condensed consolidated financial statements.
5
FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Six Months Ended June 30, 2007
Note 1 Basis of Presentation
Basis of presentation. The accompanying unaudited condensed consolidated financial statements
of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America 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, the interim financial statements do not include all of the
information and footnotes required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair statement have been included. Operating results for
the three and six months ended June 30, 2007 are not necessarily indicative of the results that may
be expected for the year ending December 29, 2007, or for any other period. The balance sheet at
December 30, 2006 has been derived from the audited consolidated financial statements at that date
but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. These
financial statements and notes should be read in conjunction with the financial statements and
notes thereto for the year ended December 30, 2006 included in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Fiscal periods. We report our results of operations using a 52 or 53 week fiscal year, which
ends on the Saturday on or before December 31. Our fiscal quarters end on the Saturday closest to
the end of the applicable calendar quarter. Fiscal 2007 will end on December 29, 2007 and will
consist of 52 weeks.
Reclassifications. Certain prior period balances have been reclassified to conform to the
current financial statement presentation. These reclassifications had no impact on previously
reported results of operations or stockholders equity.
Note 2 Significant Accounting Policies
Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the
year ended December 30, 2006 filed with the Securities and Exchange Commission. Our significant
accounting policies reflect the adoption of the provisions of FASB Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes in the first quarter of fiscal 2007 and the adoption of
FASB Statement 115, Accounting for Certain Investments in Debt and Equity Securities in the second
quarter of fiscal 2007, and have otherwise not materially changed during the three and six months
ended June 30, 2007.
Note 3 Initial Public Offering
The Securities and Exchange Commission declared the Companys first registration statements
effective on November 16, 2006, which we filed on Forms S-1 (Registration No. 333-135574) and
pursuant to Rule 462(b) (Registration No. 333-138779) under the Securities Act of 1933 in
connection with the initial public offering of the Companys common stock. Under these registration
statements, the Company registered 22,942,500 shares of its common stock, including 2,942,500
subject to an underwriters over-allotment option. First Solar registered 16,192,500 of these
shares on its own behalf and 6,750,000 of these shares on behalf of certain of its stockholders,
including one of the Companys officers. In November 2006, the Company completed the initial public
offering, in which it sold all of these shares that it registered on its behalf and on behalf of
the selling stockholders, for an aggregate public offering price of $458.9 million, which included
$58.9 million from the underwriters exercise of their over-allotment option. Of the $458.9 million
of total gross proceeds, the Company received gross proceeds of $323.9 million, against
6
which it charged $16.6 million of underwriting discounts and commissions and $4.6 million of
other costs of the offering, resulting in a net increase in the Companys paid-in capital of $302.7
million. The remaining $135.0 million of gross proceeds went to selling stockholders; they applied
$8.4 million to underwriting discounts and commissions and received $126.6 million of the offering
proceeds.
Note 4 Economic Development Funding
On July 26, 2006, we were approved to receive taxable investment incentives
(Investitionszuschüsse) of approximately 21.5 million ($28.0 million at an assumed exchange
rate of $1.30/1.00) from the State of Brandenburg, Germany. These funds will reimburse us for
certain costs we incurred building our plant in Frankfurt (Oder), Germany, including costs for the
construction of buildings and the purchase of machinery and equipment. Receipt of these incentives
is conditional upon the State of Brandenburg, Germany having sufficient funds allocated to this
program to pay the reimbursements we claim. In addition, we are required to operate our facility
for a minimum of five years and employ a specified number of employees during this period. Our
incentive approval expires on December 31, 2009. As of June 30, 2007, we had received cash payments
of $25.3 million under this program and we had accrued an additional $2.2 million that we are
eligible to receive under this program based on qualifying expenditures that we had incurred
through that date.
We are eligible to recover up to approximately 23.8 million ($30.9 million at an assumed
exchange rate of $1.30/1.00) of expenditures related to the construction of our plant in
Frankfurt (Oder), Germany under the German Investment Grant Act of 2005 (Investitionszulagen).
This Act permits us to claim tax-exempt reimbursements for certain costs we incurred building our
plant in Frankfurt (Oder), Germany,
including costs for the construction of buildings and the purchase of machinery and equipment.
Tangible assets subsidized under this program have to remain in the region for at least five years.
In accordance with the administrative requirements of the Act, we plan to claim reimbursement under
the Act in conjunction with the filing of our tax returns with the local German tax office.
Therefore we do not expect to receive funding from this program until we file our annual tax return
for fiscal 2006 in 2007. In addition, this program expired on December 31, 2006 and we can only
claim reimbursement for investments completed by this date. The majority of our buildings and
structures and our investment in machinery and equipment were completed by this date. As of June
30, 2007, we had accrued $31.6 million that we are eligible to receive under this program based on
qualifying expenditures that we had incurred through that date.
Note 5 Marketable Securities
Marketable securities at June 30, 2007 consisted of the following (in thousands):
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Gross |
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Gross |
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Unrealized |
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Unrealized |
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Market |
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Cost |
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Gains |
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Losses |
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Value |
|
Obligations of states and political subdivisions |
|
|
207,209 |
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|
|
|
|
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|
(1 |
) |
|
|
207,208 |
|
|
|
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Total |
|
$ |
207,209 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
207,208 |
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|
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|
The above unrealized losses on our investments during the second quarter of fiscal 2007
were primarily a 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, limits the types of acceptable investments, concentration as to security
holder and duration of the investment.
Market
values were determined for each individual security in the investment
portfolio using third party market quotes. Our marketable securities
consist primarily of auction rate securities and variable rate demand
notes with maturities between three months and thirty-five years. When
evaluating the investments for other-than-temporary impairment, we review factors such as the
length of time and extent to which fair value has been below the amortized cost basis, the
financial condition of the
issuer, and the Companys ability and intent to hold the investment for a period of time,
which may be sufficient for anticipated recovery in market value, which may be maturity.
7
We have classified our marketable securities as available-for-sale. All marketable
securities represent the investment of funds available for current operations, notwithstanding
their contractual maturities. Such marketable securities are recorded
at fair value and net unrealized
gains and losses are recorded as part of other comprehensive income until realized.
Realized gains and losses on the sale of all such securities are reported in earnings, computed
using the specific identification cost method.
Note 6 Consolidated Balance Sheet Details
Accounts receivable, net
Accounts receivable, net consisted of the following at December 30, 2006 and June 30, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Accounts receivable, gross |
|
$ |
27,127 |
|
|
$ |
13,736 |
|
Allowance for doubtful accounts |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
27,123 |
|
|
$ |
13,736 |
|
|
|
|
|
|
|
|
Inventories
Inventories consisted of the following at December 30, 2006 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Raw materials |
|
$ |
8,212 |
|
|
$ |
14,679 |
|
Work in process |
|
|
1,123 |
|
|
|
6,555 |
|
Finished goods |
|
|
7,175 |
|
|
|
5,614 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
16,510 |
|
|
$ |
26,848 |
|
|
|
|
|
|
|
|
Property, plant and equipment
Property, plant and equipment consisted of the following at December 30, 2006 and June 30,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Buildings and improvements |
|
$ |
21,804 |
|
|
$ |
42,813 |
|
Machinery and equipment |
|
|
79,803 |
|
|
|
152,664 |
|
Office equipment and furniture |
|
|
4,428 |
|
|
|
5,980 |
|
Leasehold improvements |
|
|
3,086 |
|
|
|
3,086 |
|
|
|
|
|
|
|
|
Gross depreciable property, plant and equipment |
|
|
109,121 |
|
|
|
204,543 |
|
Accumulated depreciation and amortization |
|
|
(18,880 |
) |
|
|
(29,992 |
) |
|
|
|
|
|
|
|
Net depreciable property, plant and equipment |
|
|
90,241 |
|
|
|
174,551 |
|
Land |
|
|
2,836 |
|
|
|
2,877 |
|
Construction in progress |
|
|
85,791 |
|
|
|
68,131 |
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
$ |
178,868 |
|
|
$ |
245,559 |
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment was $2.4 million and $6.1
million for the three months ended July 1, 2006 and June 30, 2007, respectively and was $3.4
million and $11.2 million for the six months ended July 1, 2006 and June 30, 2007, respectively.
We incurred and capitalized interest cost (into our property, plant and equipment) as follows
during the three and six months ended July 1, 2006 and June 30, 2007 (in thousands):
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Interest cost incurred |
|
$ |
1,169 |
|
|
$ |
1,474 |
|
|
$ |
2,473 |
|
|
$ |
2,522 |
|
Interest capitalized |
|
|
(884 |
) |
|
|
(191 |
) |
|
|
(1,765 |
) |
|
|
(1,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
285 |
|
|
$ |
1,283 |
|
|
$ |
708 |
|
|
$ |
1,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following at December 30, 2006 and June
30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Accounts payable |
|
$ |
14,001 |
|
|
$ |
25,388 |
|
Product warranty liability |
|
|
2,764 |
|
|
|
4,050 |
|
Income tax payable |
|
|
5,152 |
|
|
|
506 |
|
Accrued compensation and benefits |
|
|
2,642 |
|
|
|
8,159 |
|
Accrued property, plant and equipment |
|
|
1,968 |
|
|
|
2,884 |
|
Other accrued expenses |
|
|
5,556 |
|
|
|
10,407 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
32,083 |
|
|
$ |
51,394 |
|
|
|
|
|
|
|
|
Note 7 Share-Based Compensation
We measure share-based compensation cost at the grant date based on the fair value of the
award and recognize this cost as an expense over the employees requisite service period. The
share-based compensation expense that we recognized on our statements of operations for the three
and six months ended July 1, 2006 and June 30, 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Share-based compensation expense
included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
1,242 |
|
|
$ |
2,425 |
|
|
$ |
2,262 |
|
|
$ |
3,920 |
|
Research and development |
|
|
591 |
|
|
|
1,495 |
|
|
|
1,190 |
|
|
|
2,653 |
|
Selling, general and administrative |
|
|
989 |
|
|
|
2,870 |
|
|
|
1,979 |
|
|
|
5,738 |
|
Production start-up |
|
|
|
|
|
|
210 |
|
|
|
|
|
|
|
465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,822 |
|
|
$ |
7,000 |
|
|
$ |
5,431 |
|
|
$ |
12,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in share-based compensation expense was primarily the result of new awards.
The following table presents our share-based compensation expense by type of award for the
three and six months ended July 1, 2006 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Stock options |
|
$ |
2,681 |
|
|
$ |
6,980 |
|
|
$ |
5,366 |
|
|
$ |
12,660 |
|
Unrestricted stock |
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
158 |
|
Restricted stock units |
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
Net amount absorbed into inventory |
|
|
141 |
|
|
|
(78 |
) |
|
|
65 |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,822 |
|
|
$ |
7,000 |
|
|
$ |
5,431 |
|
|
$ |
12,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Share-based compensation cost capitalized in our inventory was $0.3 million at both July 1, 2006
and June 30, 2007. On April 30, 2007, we modified 474,374
of our share options to change their vesting dates from
August 31, 2008 to August 31, 2007 and 1,171,060 of our share options to change
their vesting dates from August 31, 2008 to January 15,
2008. These modifications do not affect the fair value of these share
options that we use to calculate our share-based compensation
expense, but the modifications do shorten the requisite service period
over which we recognize that compensation expense and also increase
our estimate of the number of these share options that we expect to
vest. The increase in the number of these share options that we
expect to vest increased the compensation cost that we expect to
recognize over the service periods of the share options by
$0.8 million. At June 30, 2007, we had $22.7 million of unrecognized share-based compensation
cost related to unvested stock option awards, which we expect to recognize as an expense over a
weighted-average period of approximately two years, and $1.3 million of unrecognized share-based
compensation cost related to unvested restricted stock units, which we expect to recognize as an
expense over a weighted-average period of approximately four years.
Note 8 Debt
Our long-term debt consisted of the following at December 30, 2006 and June 30, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Euro denominated loan, variable
interest Euribor plus 1.6%, due 2008
through 2012 |
|
$ |
45,216 |
|
|
$ |
62,043 |
|
Euro denominated loan, variable
interest Euribor plus 1.8%, due 2012 |
|
|
|
|
|
|
20,211 |
|
2.25% loan, due 2006 through 2015 |
|
|
14,865 |
|
|
|
14,051 |
|
0.25% 3.25% loan, due 2007 through 2009 |
|
|
5,000 |
|
|
|
4,166 |
|
Capital lease obligations |
|
|
15 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
65,096 |
|
|
|
100,483 |
|
Less unamortized discount |
|
|
(738 |
) |
|
|
(679 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
|
64,358 |
|
|
|
99,804 |
|
Less current portion |
|
|
(3,311 |
) |
|
|
(3,327 |
) |
|
|
|
|
|
|
|
Non-current portion |
|
$ |
61,047 |
|
|
$ |
96,477 |
|
|
|
|
|
|
|
|
We had outstanding borrowings of $16.3 million and $22.4 million at December 30, 2006 and June
30, 2007, respectively, which we classify as short-term debt. We must repay this debt with any
funding we receive from the Federal Republic of Germany under the Investment Grant Act of 2005, but
in any event, this debt must be paid in full by December 30, 2008.
Note 9 Commitments and Contingencies
Product warranties
We
offer warranties on our products and record an estimate of the
associated liability based on the number of solar modules under
warranty at customer locations, our historical experience with
warranty claims, our monitoring of field installation sites, our
in-house testing of our solar modules and our estimated per-module
replacement cost.
Product warranty activity during the three and six months ended July 1, 2006 and June 30,
2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Product warranty liability, beginning of period |
|
$ |
1,931 |
|
|
$ |
3,355 |
|
|
$ |
1,853 |
|
|
$ |
2,764 |
|
Accruals for new warranties issued (warranty expense) |
|
|
335 |
|
|
|
820 |
|
|
|
454 |
|
|
|
1,549 |
|
Settlements |
|
|
(177 |
) |
|
|
(12 |
) |
|
|
(178 |
) |
|
|
(12 |
) |
Change in estimate of warranty liability |
|
|
|
|
|
|
(113 |
) |
|
|
(40 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product warranty liability, end of period |
|
$ |
2,089 |
|
|
$ |
4,050 |
|
|
$ |
2,089 |
|
|
$ |
4,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Income Taxes
10
On December 31, 2006, we adopted the provisions of FIN 48, which is an interpretation of SFAS
109, Accounting for Income Taxes. Tax law is subject to significant and varied interpretation, so
an enterprise may be uncertain whether a tax position that it has taken will ultimately be
sustained when it files its tax return. FIN 48 establishes a more-likely-than-not threshold that
must be met before a tax benefit can be recognized in the financial statements and, for those
benefits that may be recognized, stipulates that enterprises should recognize the largest amount of
the tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the taxing authority. FIN 48 also addresses changes in judgments about the
realizability of tax benefits, accrual of interest and penalties on unrecognized tax benefits,
classification of liabilities for unrecognized tax benefits and related financial statement
disclosures. As permitted by FIN 48, our policy is to recognize any interest and penalties that we
might incur related to our tax positions in income tax expense.
Upon our adoption of FIN 48 at the beginning of our fiscal 2007, we identified $0.5 million of
unrecognized tax benefits from prior years that, if recognized, would affect our effective tax
rate. We also identified a liability of $0.1 million related to uncertain tax positions, which we
recorded by a cumulative effect adjustment to equity. During the six months ended June 30, 2007, we
had an increase of $0.1 million in unrecognized tax benefits that, if recognized, would affect the
effective tax rate. During the six months ended June 30, 2007, we did not identify any reductions
in unrecognized tax benefits resulting from settlements with taxing authorities or due to the lapse
of applicable statutes of limitations.
We are subject to filing requirements for income tax returns in the U.S federal jurisdiction
and various state and foreign jurisdictions. We are not presently undergoing any examinations by
any taxing authorities, but our tax years going back to 2003 are subject to examination in all tax
jurisdictions in which we operate.
At each period end, we exercise significant judgment in determining our provisions for income
taxes, our deferred tax assets and liabilities and our future taxable income for purposes of
assessing our likelihood of utilizing any future tax benefit from our deferred tax assets. Prior to
our assessment at June 30, 2007, we had a valuation allowance on all of our net deferred tax assets
in all of the taxing jurisdictions in which we operate. The ultimate realization of deferred tax
assets depends on the generation of sufficient taxable income of the appropriate character and in
the appropriate taxing jurisdictions during the future periods in which the underlying
tax-deductible temporary differences become deductible. We determined the valuation allowance on
our deferred tax assets in accordance with the provisions of SFAS 109, which require us to weigh
both positive and negative evidence in order to ascertain whether it is more likely than not that
deferred tax assets will be realized. We evaluated all significant available positive and negative
evidence, including the existence of cumulative net losses, benefits that could be realized from
available tax strategies and forecasts of future taxable income, in determining the need for a
valuation allowance on our deferred tax assets.
After applying the evaluation guidance of SFAS 109 as of June 30, 2007, we concluded that it
was more-likely-than-not that $39.2 million of deferred tax assets against which we had previously
held a full valuation allowance would be realized during future periods. This amount pertained to
U. S. deferred tax assets. The reversal of the $39.2 million of valuation allowances was based upon
managements assessment of the future realization of our U.S. deferred income tax assets. The
available positive evidence at June 30, 2007 included cumulative U.S. taxable income for the
previous 12 quarters and a projection of future taxable income. As a result of the reversal of the
valuation allowance, we recorded a tax benefit of $39.2 million on our condensed consolidated
statement of operations for the three months ended June 30, 2007, which was partially offset by tax
expenses of $2.7 million on our operations for that period. We also concluded that it was
necessary to retain a valuation allowance against all of our foreign net deferred tax assets of
$11.0 million. We will maintain this valuation allowance until sufficient positive evidence exists
to support its reversal in accordance with SFAS 109.
Note 11 Income (loss) per share
11
Basic net income (loss) per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted net income (loss) per share is computed
giving effect to all potential dilutive common stock, including stock options.
The reconciliation of the numerator and denominator used in the calculation of basic and
diluted net income (loss) per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Basic net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,461 |
) |
|
$ |
44,418 |
|
|
$ |
(8,356 |
) |
|
$ |
49,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding |
|
|
54,358 |
|
|
|
72,596 |
|
|
|
51,250 |
|
|
|
72,472 |
|
Effect of rights issue |
|
|
|
|
|
|
|
|
|
|
1,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing
basic net income (loss) per share |
|
|
54,358 |
|
|
|
72,596 |
|
|
|
52,567 |
|
|
|
72,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in
computing basic net income (loss) per
share |
|
|
54,358 |
|
|
|
72,596 |
|
|
|
52,567 |
|
|
|
72,472 |
|
Add stock options and RSU outstanding |
|
|
|
|
|
|
3,493 |
|
|
|
|
|
|
|
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing
diluted net income (loss) per share |
|
|
54,358 |
|
|
|
76,089 |
|
|
|
52,567 |
|
|
|
75,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following number of outstanding options were excluded from the computation of diluted net
income (loss) per share as they had an antidilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Options to purchase common stock and RSU |
|
|
5,171 |
|
|
|
2,786 |
|
|
|
5,200 |
|
|
|
3,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 Comprehensive Income (Loss)
Comprehensive income (loss) includes foreign currency translation adjustments, unrealized
gains on derivate instruments designated and qualifying as cash flow hedges and unrealized losses
on available-for- sale securities, the impact of which has been excluded from net income and
reflected as components of stockholders equity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(2,461 |
) |
|
$ |
44,418 |
|
|
$ |
(8,356 |
) |
|
$ |
49,446 |
|
Foreign currency translation adjustments |
|
|
27 |
|
|
|
179 |
|
|
|
(100 |
) |
|
|
340 |
|
Change in unrealized gain (loss) on marketable securities |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Change in unrealized gain (loss) on derivative
instruments |
|
|
|
|
|
|
817 |
|
|
|
|
|
|
|
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(2,434 |
) |
|
$ |
45,413 |
|
|
$ |
(8,456 |
) |
|
$ |
50,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive income were as follows (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Foreign currency translation adjustments |
|
$ |
1,002 |
|
|
$ |
1,342 |
|
Unrealized loss on marketable securities |
|
|
|
|
|
|
(1 |
) |
Unrealized gain on derivative instruments |
|
|
20 |
|
|
|
856 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
1,022 |
|
|
$ |
2,197 |
|
|
|
|
|
|
|
|
Note 13 Statement of Cash Flows
Following is a reconciliation of net income (loss) to net cash provided by or used in
operating activities for the six months ended July 1, 2006 and June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(8,356 |
) |
|
$ |
49,446 |
|
Adjustment to reconcile net income (loss) to cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,388 |
|
|
|
11,150 |
|
Stock-based compensation |
|
|
5,431 |
|
|
|
12,776 |
|
Deferred income taxes |
|
|
|
|
|
|
(39,218 |
) |
Excess tax benefit from share-based compensation arrangements |
|
|
|
|
|
|
(14,026 |
) |
Loss on disposal of property and equipment |
|
|
|
|
|
|
(2 |
) |
Non-cash interest |
|
|
281 |
|
|
|
(3 |
) |
Non-cash loss |
|
|
45 |
|
|
|
|
|
Provision for excess and obsolete inventories |
|
|
|
|
|
|
(83 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(11,710 |
) |
|
|
13,518 |
|
Inventories |
|
|
(1,046 |
) |
|
|
(10,139 |
) |
Prepaid expenses and other current assets |
|
|
(1,840 |
) |
|
|
(11,090 |
) |
Other non-current assets |
|
|
|
|
|
|
(319 |
) |
Accounts payable and accrued expenses |
|
|
4,670 |
|
|
|
13,325 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(781 |
) |
|
|
(24,111 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(9,137 |
) |
|
$ |
25,335 |
|
|
|
|
|
|
|
|
Note 14 Derivative Financial Instruments
We have interest rate swaps with a financial institution that effectively convert to fixed
rates the floating variable rate of Euribor on certain drawdowns taken on the term loan portion of
our credit facility with a consortium of banks led by IKB Deutsche Industriebank AG. At June 30,
2007, the notional values of the interest rate swaps (in thousands) and their annual fixed payment
rates and maturities were as follows:
|
|
|
|
|
|
|
Notional Amount |
|
Fixed Rate |
|
Maturity |
14,921 ($19,397 at an assumed exchange rate of $1.30/1.00)
|
|
|
3.96 |
% |
|
December 2012 |
9,902 ($12,873 at an assumed exchange rate of $1.30/1.00)
|
|
|
4.03 |
% |
|
December 2012 |
3,928 ($5,106 at an assumed exchange rate of $1.30/1.00)
|
|
|
4.07 |
% |
|
December 2012 |
10,685 ($13,891 at an assumed exchange rate of $1.30/1.00)
|
|
|
4.29 |
% |
|
December 2012 |
3,248 ($4,222 at an assumed exchange rate of $1.30/1.00)
|
|
|
4.25 |
% |
|
December 2012 |
3,363 ($4,372 at an assumed exchange rate of $1.30/1.00)
|
|
|
4.55 |
% |
|
December 2012 |
13
The notional amounts of the interest rate swaps are scheduled to decline in accordance with
our scheduled principal payments on the hedged term loan drawdowns. These derivative financial
instruments qualified for accounting as cash flow hedges in accordance with SFAS 133, Accounting
for Derivative Instruments and Hedging Activities and we designated them as such. As a result, we
classified the aggregate fair value of the interest rate swap agreements, which was $0.8 million,
as an other current asset on our balance sheet at June 30, 2007 and we record changes in that fair
value in other comprehensive income. We assessed the interest rate swap agreements as highly
effective as cash flow hedges at June 30, 2007. We use interest rate swap agreements to mitigate
our exposure to interest rate fluctuations associated with certain of our debt instruments; we do
not use interest rate swap agreements for speculative or trading purposes.
During the six months ended June 30, 2007, we purchased a forward foreign exchange contract to
hedge certain foreign currency denominated intercompany long-term debt. This hedge does not qualify
for hedge accounting treatment in accordance with the provisions of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. Accordingly, we recognize gains or losses from the
fluctuation in foreign exchange rates and the valuation of this hedging contract in other expenses.
We do not use derivative financial instruments for trading or speculative purposes. As of June 30,
2007, we had one outstanding foreign exchange forward contract to sell 20.0 million for $26.8
million at a fixed exchange rate of
$1.34/1.00.
Unrealized mark-to-market losses recorded in the three and six
months ended June 30, 2007 were $0.2 million and
$0.5 million, respectively. The contract will be due on February 27, 2009.
Note 15 Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are currently assessing the impact of SFAS 159 on our consolidated
financial position and results of operations.
In June 2007, the FASB Emerging Issues Task Force (EITF) published Issue No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities. EITF No. 07-3 requires that these payments made by an entity to third
parties be deferred and capitalized and recognized as an expense as the related goods are delivered
or the related services are performed. Entities report the effects of applying this Issue as a
change in accounting principle through a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption. EITF No. 07-3 is effective for us beginning on January 1,
2008. Earlier application is not permitted. We do not expect that adoption of EITF No. 07-3 will
have a material effect on our financial position or results of operations.
In May 2007, the FASB issued FASB Staff Position, or FSP, No. FIN 48-1, Definition of
Settlement in FASB Interpretation No. 48, to amend FIN No. 48 by providing that previously
unrecognized tax benefits can be recognized when the tax positions are effectively settled upon
examination by a taxing authority. According to FSP FIN 48-1, an enterprises tax position will be
considered effectively settled if the taxing authority has completed its examination, the
enterprise does not plan to appeal, and it is remote that the taxing authority would reexamine the
tax position in the future. FSP FIN 48-1 must be applied upon the initial adoption of FIN No. 48.
Enterprises that did not apply FIN No. 48 in a manner consistent with the provisions of FSP FIN
48-1 would be required to retrospectively apply its provisions to the date of the initial adoption
of FIN No. 48. FSP FIN 48-1 did not have a material impact on our initial adoption of FIN No. 48.
Note 16 Subsequent Events
14
On July 9, 2007 we announced that we entered into five agreements for the manufacture and sale
of solar modules totaling 685 Megawatts. These new agreements are expected to allow for sales of
approximately $1.28 billion at an assumed exchange rate of $1.30/1.00 over the period of 2007
to 2012. Included in the new agreements are long term agreements with EDF Energies Nouvelles (EDF
EN), a renewable energy producer specializing in wind, hydro, biomass, and solar power plants; and
Séchilienne-Sidec, a renewable energy producer specializing in thermal, wind, and solar power
plants. In addition, First Solar and the Juwi Group have also agreed to increase volumes under an
existing long term supply agreement. These customers are targeting development of solar projects
with First Solar modules in Spain, Italy, France, Greece and Portugal. Also included in the new
agreements is a long term agreement with RIO Energie GmbH & Co. KG, a joint venture of the
Stadtwerke Mainz AG utility company and the Juwi Group with a focus on the development of solar
power plants in the utility service region of the Stadtwerke Mainz AG and its subsidiaries through
2012. These new long term agreements are structured on terms similar to our existing long term
supply contracts. Furthermore, we entered into new multi-year sales contracts with SunEdison, LLC,
a leading provider of solar generated electricity to commercial, municipal, and utility customers
in North America. SunEdison will deploy First Solar modules in Ontario, Canada, which has adopted a
feed-in tariff for solar energy.
On July 5, 2007 we completed a tender offer to amend, at the election of the applicable option
holder, certain portions of options to purchase Company stock that were granted under the Companys
2003 Unit Option Plan between May 1, 2004 and October 1, 2005, were held by Eligible Optionees as
of the Expiration Time, have vested or will vest on or after January 1, 2005 and were still
outstanding and unexercised on the expiration date of the offer. The offer expired on July 5, 2007
and we accepted for amendment Eligible Portions of Eligible Options to purchase 2,135,834 shares of
common stock.
On July 19, 2007
we filed a registration statement on Form S-1 for a proposed follow-on
offering of our common stock. The planned offering will be comprised of up to 4,000,000 shares
offered by us and 5,650,000 shares offered by existing stockholders. We intend to use the net
proceeds from this offering for the build of plant two at our Malaysian manufacturing center, fund
the associated production start-up and ramp-up costs and use the remainder for working capital and
general corporate purposes, including possible future capacity expansions.
On July 30, 2007 the compensation committee of our Board approved the grant of 301,340 options
and restricted stock units to certain of our current employees and consultants. The estimated grant
date fair value, after estimated forfeitures, for these grants is approximately $28.0 million, of
which $8.7 million will be recognized as share-based compensation expense in the third quarter of
fiscal 2007 due to immediate vesting upon grant of approximately 72,202 restricted stock units and
the remaining amount of $19.3 million will be recognized over the respective vesting period, which
is generally four years.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of
the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks,
uncertainties and assumptions that are difficult to predict. All statements in this quarterly
report on Form 10-Q, other than statements of historical fact, are forward-looking statements.
These forward-looking statements are made pursuant to safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among
other things, concerning our business strategy, including anticipated trends and developments in
and management plans for, our business and the markets in which we operate; future financial
results, operating results, revenues, gross margin, operating expenses, products, projected costs
and capital expenditures; research and development programs; sales and marketing initiatives; and
competition. In some cases, you can identify these statements by forward-looking words, such as
estimate, expect, anticipate, project, plan, intend, believe, forecast, foresee,
likely, may, should, goal, target, might, will, could, predict and continue,
15
the negative or plural of these words and other comparable terminology. The forward-looking
statements are only predictions based on our current expectations and our projections about future
events. All forward-looking statements included in this quarterly report on Form 10-Q are based
upon information available to us as of the filing date of this quarterly report on Form 10-Q. You
should not place undue reliance on these forward-looking statements. We undertake no obligation to
update any of these forward-looking statements for any reason. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results,
levels of activity, performance, or achievements to differ materially from those expressed or
implied by these statements. These factors include the matters discussed in the section entitled
Risk Factors elsewhere in this quarterly report on Form 10-Q. You should carefully consider the
risks and uncertainties described under this section.
The following discussion and analysis should be read in conjunction with our condensed
consolidated financial statements and the accompanying notes contained in this quarterly report on
Form 10-Q. Unless expressly stated or the context otherwise requires, the terms we, our, us
and First Solar refer to First Solar, Inc. and its subsidiaries.
Overview
We design and manufacture solar modules using a proprietary thin film semiconductor technology
that has allowed us to reduce our average solar module manufacturing costs to among the lowest in
the world. Each solar module uses a thin layer of cadmium telluride semiconductor material to
convert sunlight into electricity. We manufacture our solar modules on a high-throughput production
line and we perform all manufacturing steps ourselves in an automated, proprietary and continuous
process. In 2006 and the first six months of 2007, we sold almost all of our solar modules to solar
project developers and system integrators headquartered in Germany.
First Solar was founded in 1999 to bring an advanced thin film semiconductor process into
commercial production through the acquisition of predecessor technologies and the initiation of a
research, development and production program that allowed us to improve upon the predecessor
technologies and launch commercial operations in January 2002. Currently, we manufacture our solar
modules and conduct our research and development activities at our Perrysburg, Ohio and
Frankfurt/Oder, Germany manufacturing facility. We completed the qualification of our base plant in
Perrysburg for high volume production in November 2004. In April 2007, we also started initial
production at a 120MW manufacturing facility in Germany, which we expect to reach full capacity by
the fourth quarter of 2007. In April 2007, we also began construction of plant one of our Malaysia
manufacturing center, and we plan to begin construction of plant two
in the fourth quarter of 2007. Our
objective is to become, by 2010, the first solar module manufacturer to offer a solar electricity
solution that competes on a non-subsidized basis with the price of retail electricity in key
markets in North America, Europe and Asia. To approach the price of retail electricity in such
markets, we believe that we will need to reduce our manufacturing costs per watt by an additional
40-50%, assuming prices for traditional energy sources remain flat on an inflation adjusted basis.
We converted, on February 22, 2006, from a Delaware limited liability company to a Delaware
corporation. Prior that date, we operated as a Delaware limited liability company. On March 31,
2007 we merged our United States subsidiaries into the U.S. parent company, First Solar Inc.
Net Sales
We generate substantially all of our net sales from the sale of solar modules. Over the past
three years and during the first six months of 2007, the main constraint limiting our sales has
been production capacity as customer demand has exceeded the number of solar modules we could
produce. We price and sell our solar modules per watt of power. As a result, our net sales can
fluctuate based on our output of sellable watts. We currently sell almost all of our solar modules
to solar project developers and system integrators headquartered in Germany and France, which then
resell our solar modules to end-users who receive government subsidies. Our net sales could be
negatively impacted if legislation reduces the current subsidy programs in Europe, North America,
or Asia or if interest rates increase, which could impact our end-users ability to either meet
their target return on investment or finance their projects. We have entered into
16
contracts for the purchase and sale of our solar modules with nine European project
developers, system integrators and operators of renewable energy projects. We refer to these as our
Long Term Sales Contracts. These contracts account for a significant portion of our planned
production over the period from 2007 through 2012 and therefore will significantly affect our
overall financial performance.
Under our customer contracts, starting in April 2006, we transfer title and risk of loss to
the customer and recognize revenue upon shipment. Under our customer contracts in effect prior to
April 1, 2006, we did not transfer title or risk of loss, or recognize revenue, until the solar
modules were received by our customers. Our customers do not have extended payment terms or rights
of return under these contracts.
We retain the right to terminate the Long Term Sales Contracts upon 12 months notice and the
payment of a termination fee if we determine that certain material adverse changes have occurred,
including one or more of the following: new laws, rules or regulations with respect to our
production, distribution, installation, or reclamation and recycling program have a substantial
adverse impact on our business; unanticipated technical or operational issues result in our
experiencing widespread, persistent quality problems or the inability to achieve stable conversion
efficiencies at planned levels; or extraordinary events beyond our control substantially increase
the cost of our labor, materials or utility expenses or significantly reduce our throughput.
Our customers are entitled to certain remedies in the event of missed deliveries of kilowatt
volume. These delivery commitments are established through rolling four quarter forecasts to be
negotiated with each of the customers 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 credit representing a
percentage of the delinquent revenue. If we do not meet our annual minimum volume shipments or the
minimum average watt per module, our customers also have the right to terminate these contracts on
a prospective basis.
No single customer accounted for more than 22% of our net sales in the six months ended June
30, 2007.
Cost of sales
Our cost of sales includes the cost of raw materials, such as tempered back glass, TCO coated
front glass, cadmium telluride, laminate, connector assemblies and laminate edge seal. In addition,
other items contributing to our cost of sales are direct labor and manufacturing overhead such as
engineering expense, equipment maintenance, environmental health and safety, quality and production
control and procurement. Cost of sales also includes depreciation of manufacturing plant and
equipment and facility related expenses. In addition, we accrue warranty and end of life
reclamation and recycling expenses to our cost of sales.
We implemented a program in 2005 to reclaim and recycle our solar modules after their use.
Under our reclamation and recycling program, we enter into an agreement with the end-users of the
photovoltaic systems that use our solar modules. In the agreement, we commit, at our expense, to
remove the solar modules from the installation site at the end of their life and transport them to
a processing center where the solar module materials and components will be recycled, and the owner
agrees not to dispose of the solar modules except through our program or another program that we
approve. The photovoltaic system owner is responsible for disassembling the solar modules and
packaging them in containers that we provide. At the time we sell a solar module, we record an
expense in cost of sales equal to the present value of the estimated future end of life obligation.
We record the accretion expense on this future obligation to selling, general and administrative
expense.
Overall, we expect our cost of sales per watt to decrease over the next several years due to
an increase of sellable watts per solar module, an increase in unit output per line, geographic
diversification into lower-cost manufacturing regions and more efficient absorption of fixed costs
driven by economies of scale.
Research and development
17
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. In 2006, we began adding equipment for further process
developments and recording the depreciation of such equipment as research and development expense.
We may also allocate a portion of the annual operating cost of the Ohio expansion to research and
development expense.
Selling, general and administrative
Selling, general and administrative expense consists primarily of salaries and other
personnel-related costs, professional fees, insurance costs, travel expense and other selling
expenses. We expect these expenses to increase in the near term, both in absolute dollars and as a
percentage of net sales, in order to support the growth of our business as we expand our sales and
marketing efforts, improve our information processes and systems and implement the financial
reporting, compliance and other infrastructure required for a public company. Over time, we expect
selling, general and administrative expense to decline as a percentage of net sales and on a cost
per watt basis as our net sales and our total watts produced increase.
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 expect to incur significant production start-up expenses
in fiscal year 2007 in connection with the German plant and plant one and plant two at the Malaysia
manufacturing center. In general, we expect production start-up expenses per production line to be
higher when we build an entire new manufacturing facility compared with the addition of a new
production line at an existing manufacturing facility, primarily due to the additional
infrastructure investment required. Over time, we expect production start-up expenses to decline as
a percentage of net sales and on a cost per watt basis as a result of economies of scale.
Interest expense
Interest expense is associated with various debt financings.
Use of estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amount of assets, liabilities, net sales and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those
related to inventories, intangible assets, income taxes, warranty obligations, marketable
securities, end of life reclamation and recycling, contingencies and litigation and stock-based
compensation. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources.
Results of Operations
The following table sets forth our consolidated statement of operations as a percentage of net
sales for the periods indicated:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 1, |
|
June 30, |
|
July 1, |
|
June 30, |
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
67.3 |
% |
|
|
63.3 |
% |
|
|
70.2 |
% |
|
|
59.5 |
% |
Gross profit |
|
|
32.7 |
% |
|
|
36.7 |
% |
|
|
29.8 |
% |
|
|
40.5 |
% |
Research and development |
|
|
5.5 |
% |
|
|
4.9 |
% |
|
|
7.4 |
% |
|
|
4.7 |
% |
Selling, general and administrative |
|
|
29.2 |
% |
|
|
22.4 |
% |
|
|
33.7 |
% |
|
|
21.5 |
% |
Production start up |
|
|
14.6 |
% |
|
|
2.0 |
% |
|
|
16.0 |
% |
|
|
6.9 |
% |
Operating income (loss) |
|
|
(16.6 |
)% |
|
|
7.4 |
% |
|
|
(27.3 |
)% |
|
|
7.4 |
% |
Foreign currency gain (loss) |
|
|
7.8 |
% |
|
|
0.0 |
% |
|
|
7.5 |
% |
|
|
(0.2 |
)% |
Interest expense |
|
|
(1.0 |
)% |
|
|
(1.6 |
)% |
|
|
(1.7 |
)% |
|
|
(1.1 |
)% |
Other income (expense), net |
|
|
0.9 |
% |
|
|
4.3 |
% |
|
|
1.4 |
% |
|
|
5.1 |
% |
Income tax benefit |
|
|
0.1 |
% |
|
|
47.3 |
% |
|
|
|
|
|
|
23.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(8.8 |
)% |
|
|
57.4 |
% |
|
|
(20.1 |
)% |
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 1, 2006 and June 30, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Net sales |
|
$ |
27,861 |
|
|
$ |
77,223 |
|
|
$ |
49,362 |
|
|
|
177 |
% |
The increase in our net sales was due primarily to a 172% increase in the MW volume of solar
modules sold in the second quarter of 2007 compared to the second quarter of 2006. We were able to
increase the MW volume of solar modules sold primarily as a result of the full production of our
Ohio expansion, commencement of production at our German plant and continued improvements to our
overall production throughput. In addition, we increased the average number of sellable watts per
solar module from approximately 62 watts in the second quarter of 2006 to approximately 68 watts in
the second quarter of 2007. Our average selling price in the second quarter of 2007 increased to
$2.37 from $2.32 in the second quarter of 2006. Our average selling price was positively impacted
by $0.17 due to a favorable foreign exchange rate between the U.S. dollar and euro, partially
offset by a price decline. In both periods, almost all of our net sales resulted from sales of
solar modules to customers headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Cost of sales |
|
$ |
18,761 |
|
|
$ |
48,852 |
|
|
$ |
30,091 |
|
|
|
160 |
% |
% of Net sales |
|
|
67.3 |
% |
|
|
63.3 |
% |
|
|
|
|
|
|
|
|
Direct material expense increased $11.7 million, warranty and end of life costs relating to
the reclamation and recycling of our solar modules increased $1.2 million, sales freight and other
costs increased $0.6 million, in each case, primarily as a result of higher production volumes in
the second quarter of 2007 compared to the second quarter of 2006. In addition, manufacturing
overhead costs increased by $16.6 million, which was primarily composed of an increase in salaries
and personnel related expenses of $9.5 million, including $1.2 million in share-based compensation
expense, resulting from the infrastructure associated with our Ohio expansion and German plant
build-outs, facility and related expenses of $3.9 million and depreciation expense of $3.2 million,
primarily as a result of additional equipment becoming operational at our Ohio and German plants.
19
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Gross profit |
|
$ |
9,100 |
|
|
$ |
28,371 |
|
|
$ |
19,271 |
|
|
|
212 |
% |
% Gross margin |
|
|
32.7 |
% |
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $19.3 million from $9.1 million in the second quarter of 2006 to
$28.4 million in the second quarter of 2007, reflecting an increase in net sales. As a percentage
of sales, gross margin increased 4.0 percentage points from 32.7% in the second quarter of 2006 to
36.7% in the second quarter of 2007, representing increased leverage of our fixed cost
infrastructure and scalability associated with our plant expansions, which drove a 172% increase in
the number of MW sold over the same time period. Additionally, we incurred $7.6 million or 9.8% of
revenues of costs associated with the ramp of our German plant in the second quarter of 2007 versus
$1.1 million or 3.9% of revenues of costs incurred in the second quarter of 2006 related to the
ramp of our Ohio expansion.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Research and development |
|
$ |
1,536 |
|
|
$ |
3,763 |
|
|
$ |
2,227 |
|
|
|
145 |
% |
% of Net sales |
|
|
5.5 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
The increase in research and development expense was primarily the result of a $2.1 million
increase in personnel related expense, which included share-based compensation expense of $1.5
million in the second quarter of 2007 compared to $0.6 million for the same period in 2006, as a
result of increased headcount. Consulting and other expenses also increased by $0.3 million and
were partially offset by a $0.2 million increase in grant revenue received over the same time
period.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Selling, general and
administrative |
|
$ |
8,133 |
|
|
$ |
17,285 |
|
|
$ |
9,152 |
|
|
|
113 |
% |
% of Net sales |
|
|
29.2 |
% |
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased primarily as a result of an increase in
salaries and personnel-related expenses of $5.6 million due to increased headcount and an increase
in share-based compensation expense from $1.0 million in the second quarter of 2006 compared to
$2.9 million in the second quarter of 2007. In addition, legal and professional service fees
increased by $2.9 million and other expenses increased by $0.7 million from the second quarter of
2006 to the second quarter of 2007 primarily resulting from expenses incurred in connection with
being a public company.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Production start-up |
|
$ |
4,062 |
|
|
$ |
1,523 |
|
|
$ |
(2,539 |
) |
|
|
(63 |
)% |
% of Net sales |
|
|
14.6 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
In the second quarter of 2007, we incurred $1.5 million of production start-up expenses
related to our Malaysia expansion, including related legal and regulatory costs, compared with $4.1
million of production
20
start-up expenses for our Ohio and German plant expansions during the second quarter of 2006.
Production start-up expenses are primarily attributable to the cost of labor and material and
depreciation expense to run and qualify the line, related facility expenses and management of our
replication process.
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Foreign exchange gain |
|
$ |
2,190 |
|
|
$ |
21 |
|
|
$ |
(2,169 |
) |
|
|
N.M. |
|
Foreign currency gain decreased by $2.2 million during the three months ended June 30, 2007
compared with the three months ended July 1, 2006, primarily as a result of lower euro denominated
asset balances and, partially offset by the implementation of a hedging program for certain
inter-company loans.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Interest expense |
|
$ |
(285 |
) |
|
$ |
(1,283 |
) |
|
$ |
998 |
|
|
|
N.M. |
|
Interest
expense, net of amounts capitalized, increased by $1.0 million during the three months
ended June 30, 2007 compared with the three months ended July 1, 2006 primarily as a result of
additional draws on our credit facility with IKB.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Other income (expense), net |
|
$ |
242 |
|
|
$ |
3,326 |
|
|
$ |
3,084 |
|
|
|
N.M. |
|
The increase in other income of $3.1 million in the three months ended June 30, 2007 compared
with the three months ended July 1, 2006 was primarily due to increased interest income from higher
cash balances as a result of our initial public offering in the fourth quarter of 2006.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Three Month Period Change |
Income tax benefit |
|
$ |
23 |
|
|
$ |
36,554 |
|
|
$ |
36,531 |
|
|
|
N.M. |
|
The
income tax benefit of $36.6 million during the three months ended June 30, 2007 is mainly
due to the reversal of valuation allowances of $39.2 million against previously established U.S.
deferred income tax assets, offset by $2.7 million in current income tax provision. The reversal
was based upon our updated assessment of the future realization of our deferred income tax assets.
The available positive evidence at June 30, 2007 included cumulative U.S. taxable income for the
previous 12 quarters and a projection of future taxable income.
Six Months Ended July 1, 2006 and June 30, 2007
21
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Net sales |
|
$ |
41,485 |
|
|
$ |
144,172 |
|
|
$ |
102,687 |
|
|
|
248 |
% |
The increase in our net sales was due primarily to a 241% increase in the MW volume of solar
modules sold in the first half of 2007 compared with the first half of 2006. We were able to
increase the MW volume of solar modules sold primarily as a result of the full production ramp of
our Ohio expansion, commencement of production at our German plant, and continued improvements to
our production throughput. In addition, we increased the average number of sellable watts per solar
module from approximately 62 watts in the first six months of 2006 to approximately 67 watts in the
first six months of 2007. Our average selling price in the first six months of 2007 was $2.35 from
$2.30 in the first six months of 2006. Our average selling price was positively impacted by $0.17
due to a favorable foreign exchange rate between the U.S. dollar and euro, partially offset by a
price decline. In both periods, almost all of our net sales resulted from sales of solar
modules to customers headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Cost of sales |
|
$ |
29,113 |
|
|
$ |
85,759 |
|
|
$ |
56,646 |
|
|
|
195 |
% |
% of Net sales |
|
|
70.2 |
% |
|
|
59.5 |
% |
|
|
|
|
|
|
|
|
Direct material expense increased $25.2 million, warranty and end of life costs relating to
the reclamation and recycling of our solar modules increased $2.4 million, sales freight and other
costs increased $1.3 million, in each case, primarily as a result of higher production volumes in
the first six months of 2007 compared with the first six months of 2006. In addition, manufacturing
overhead costs increased by $27.7 million, which was primarily composed of an increase in salaries
and personnel related expenses of $15.6 million, including $1.7 million share-based compensation
expense, resulting from the infrastructure associated with our Ohio expansion and German plant
build-outs, facility and related expenses of $5.7 million and depreciation expense of $6.4 million,
primarily as a result of additional equipment becoming operational at our Ohio and German plants.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Gross profit |
|
$ |
12,372 |
|
|
$ |
58,413 |
|
|
$ |
46,041 |
|
|
|
372 |
% |
% Gross margin |
|
|
29.8 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $46.0 million from $12.4 million in the first six months of 2006 to
$58.4 million in the first six months of 2007, reflecting an increase in net sales. As a percentage
of sales, gross margin increased 10.7 percentage points from 29.8% in the first six months of 2006
to 40.5% in the first six months of 2007, representing increased leverage of our fixed cost
infrastructure and scalability associated with our plant expansions, which drove a 241% increase in
the number of MW sold. Additionally, we incurred $7.6 million or 5.3% of revenues of costs
associated with the ramp of our German plant in the first six months of 2007 versus $1.1 million or
2.7% of revenues of costs incurred in the first six months of 2006 related to the ramp of our Ohio
expansion.
22
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Research and development |
|
$ |
3,055 |
|
|
$ |
6,821 |
|
|
$ |
3,766 |
|
|
|
123 |
% |
% of Net sales |
|
|
7.4 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
The increase in research and development expense was primarily the result of a $3.6 million
increase in personnel related expense, which included share-based compensation expense of $2.7
million in the first six months of 2007 compared to $1.2 million for the same period in 2006, due
to increased headcount and additional option awards. Consulting and other expenses also increased
by $0.8 million partially offset by a $0.6 million increase in grant revenue received over the same
time period.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Selling, general and
administrative |
|
$ |
14,005 |
|
|
$ |
30,975 |
|
|
$ |
16,970 |
|
|
|
121 |
% |
% of Net sales |
|
|
33.7 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased primarily as a result of an increase in
salaries and personnel-related expenses of $11.1 million due to increased headcount and an increase
in share-based compensation expense from $2.0 million in the first six months of 2006 compared to
$5.7 million in the first six months of 2007. In addition, legal and professional service fees
increased by $5.3 million and other expenses increased by $0.6 million from the first six months of
2006 to the first six months of 2007 primarily resulting from expenses incurred in connection with
being a public company.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Production start-up |
|
$ |
6,641 |
|
|
$ |
9,997 |
|
|
$ |
3,356 |
|
|
|
51 |
% |
% of Net sales |
|
|
16.0 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
In the first six months of 2007, we incurred $10.0 million of production start-up expenses
related to our German and Malaysia expansions, including related legal and regulatory costs and
increased headcount, compared with $6.6 million of production start-up expenses for our Ohio and
German plant expansions during the first six months of 2006. Production start-up expenses are
primarily attributable to the cost of labor and material and depreciation expense to run and
qualify the line, related facility expenses and management of our replication process.
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
July 1, 2006 |
|
June 30, 2007 |
|
|
Six Month Period Change |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss)
|
|
$ |
3,090 |
|
|
$ |
(249 |
) |
|
$ |
(3,339 |
) |
|
N.M. |
Foreign exchange gain decreased by $3.3 million from the six months ended July 1, 2006 to the
six months ended June 30, 2007 primarily as a result of lower euro denominated asset balances and,
partially offset by the implementation of a hedging program for certain inter-company loans.
23
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Interest expense |
|
$ |
(708 |
) |
|
$ |
(1,484 |
) |
|
$ |
776 |
|
|
|
N.M. |
|
Interest
expense, net of amounts capitalized, increased by $0.8 million from the six months
ended July 1, 2006 to the six months ended June 30, 2007 primarily as a result of additional draws
on our credit facility with IKB.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Other income (expense), net |
|
$ |
591 |
|
|
$ |
7,286 |
|
|
$ |
6,695 |
|
|
|
N.M. |
|
The increase in other income of $6.7 million in the six months ended June 30, 2007 compared
with the six months ended July 1, 2006 was primarily due to increased interest income from higher
cash balances as a result of our initial public offering in the fourth quarter of 2006.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
(Dollars in thousands) |
|
July 1, 2006 |
|
June 30, 2007 |
|
Six Month Period Change |
Income tax benefit
|
|
|
$ |
|
|
$33,273 |
|
|
$ |
33,273 |
|
|
|
|
N.M. |
|
The income tax benefit of $33.3 million during the six months ended June 30, 2007 is mainly due to
the reversal of valuation allowances of $39.2 million previously established against U.S. deferred
income tax assets, offset by $6.0 million in current income tax provision. The reversal was based
upon our updated assessment of the future realization of our deferred income tax asset. The
available positive evidence at June 30, 2007 included cumulative U.S. taxable income for the
previous 12 quarters and a projection of future taxable income.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that affect our more significant
judgments and estimates used in the preparation of our condensed consolidated financial statements,
refer to our Annual Report on Form 10-K filed with the Securities and Exchange Commission. There
have been no changes to our critical accounting policies since December 30, 2006, with the
exception of the accounting related to uncertainty in income taxes and accounting for investments
in debt and equity securities.
Liquidity and Capital Resources
As of June 30, 2007, we had $315.0 million in cash, cash equivalents and marketable
securities compared to $308.4 million at December 30, 2006.
Operating Activities
Cash provided by operating activities was $25.3 million during the first six months of 2007
compared to cash used in operating activities of $9.1 million during the same period in 2006. Cash
received from customers increased to $157.6 million during the first six months of 2007 from $31.4
million during the first six months of 2006 mainly due to an increase in net sales. This increase
was partially offset by an increase in cash paid to suppliers and employees of $118.7 million
during the first six months of 2007
24
compared to cash paid to suppliers and employees of $40.8 million during the same period in
2006, mainly due to an increase in raw materials, 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 $287.9 million during the first six months of 2007
compared with $69.5 million during the same period in 2006. Cash used in investing activities
resulted primarily from capital expenditures in these periods and the net purchase of marketable
securities of $198.6 million during the second quarter of fiscal 2007. Capital expenditures were
$80.4 million during the first six months of 2007 and $67.8 million during the same period in 2006.
The increase in capital expenditures was primarily due to our investments related to the
construction of our new plants in Germany and Malaysia.
Financing Activities
Cash provided by financing activities was $61.3 million during the first six months of 2007
compared with $83.4 million during the same period in 2006. During the first six months of 2007 we
received $41.3 million from additional drawings under our IKB credit facilities. Net proceeds from
the exercise of stock options were $2.8 million. Tax benefits related to the exercise of stock
options during the six months ended June 30, 2007 were $14.0 million. In addition, we received $4.8
million in taxable investment incentives (Investitionszuschuesse) from the State of Brandenburg
related to the construction of our plant in Frankfurt/Oder, Germany. Cash provided by financing
activities for the first six months of 2006 was primarily due to the issuance of convertible senior
subordinated notes in the aggregate principal amount of $74.0 million (resulting in cash of $73.3
million, net of issuance costs). We extinguished these notes in the second quarter of 2006 by
payment of 4.3 million shares of our common stock. Also, during the first six months of 2006, we
received equity contributions of $30.0 million from our majority stockholder, which was partially
offset by $20.0 million in net repayments of related party debt.
We expect capital expenditures for fiscal 2007 to average between 60% and 65% of our revenues.
We believe that our current cash and cash equivalents, cash flows from operating activities
and government grants and low interest debt financings for our German plant will be sufficient to
meet our working capital and capital expenditures needs for at least the next 12 months. However,
if our financial results or operating plans change from our current assumptions, we may not have
sufficient resources to support our business plan. As a result, we may engage in one or more debt
or equity financings in the future that would result in increased expenses or dilution to our
existing stockholders. If we are unable to obtain debt or equity financing on reasonable terms, we
may be unable to execute our expansion strategy. On July 19, 2007 we filed a registration
statement on Form S-1 for a proposed follow-on offering of our common stock. The planned offering
will be comprised of up to 4,000,000 shares offered by us and 5,650,000 shares offered by existing
stockholders. We intend to use the net proceeds from shares offered by us, for the build of plant two at
our Malaysian manufacturing center, fund the associated production start-up and ramp-up costs and
use the remainder for working capital and general corporate purposes, including possible future
capacity expansions.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2007.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007.
25
We are currently assessing the impact of SFAS 159 on our consolidated financial position and
results of operations.
In June 2007, the FASB Emerging Issues Task Force (EITF) published Issue No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities. EITF No. 07-3 requires that these payments made by an entity to third
parties be deferred and capitalized and recognized as an expense as the related goods are delivered
or the related services are performed. Entities report the effects of applying this Issue as a
change in accounting principle through a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption. EITF No. 07-3 is effective for us beginning on January 1,
2008. Earlier application is not permitted. We do not expect that adoption of EITF No. 07-3 will
have a material effect on our financial position or results of operations.
In May 2007, the FASB issued FASB Staff Position, or FSP, No. FIN 48-1, Definition of
Settlement in FASB Interpretation No. 48, to amend FIN No. 48 by providing that previously
unrecognized tax benefits can be recognized when the tax positions are effectively settled upon
examination by a taxing authority. According to FSP FIN 48-1, an enterprises tax position will be
considered effectively settled if the taxing authority has completed its examination, the
enterprise does not plan to appeal, and it is remote that the taxing authority would reexamine the
tax position in the future. FSP FIN 48-1 must be applied upon the initial adoption of FIN No. 48.
Enterprises that did not apply FIN No. 48 in a manner consistent with the provisions of FSP FIN
48-1 would be required to retrospectively apply its provisions to the date of the initial adoption
of FIN No. 48. FSP FIN 48-1 did not have a material impact on our initial adoption of FIN No. 48.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Our international operations accounted for 100.0% of our net sales in the first six months of
2007 and 99.9% of our net sales in the first six months of 2006. In the first six months of 2007
and the first six months of 2006, all of our international sales were denominated in euros. As a
result, we have exposure to foreign exchange risk with respect to almost all of our net sales.
Fluctuations in currency exchange rates, particularly in the U.S. dollar to euro exchange rate,
affect our gross and net profit margins and could result in foreign currency and operating losses.
Historically, most of our exposure to currency exchange risk has related to currency gains and
losses from the time we sign and settle our sales contracts. For example, our Long Term Supply
Contracts obligate us to deliver solar modules at a fixed price in euros per watt and do not adjust
for fluctuations in the U.S. dollar to euro exchange rate. In the first six months of 2007, a 10%
change in currency exchange rates would have impacted our net sales by $14.4 million.
In the past, currency exchange rate fluctuations have had an impact on our business and
results of operations. For example, currency exchange rate fluctuations positively impacted our
cash flows by $1.0 million in the first six months of 2007 and negatively impacted our cash flows
by $0.1 million in the first six months of 2006. Although we cannot predict the impact of future
currency exchange rate fluctuations on our business or results of operations, we believe that we
may have increased risk associated with currency exchange rate fluctuations in the future. As of
June 30, 2007, we had one outstanding foreign exchange forward contract to sell 20.0 million
for $26.8 million at a fixed exchange rate of $1.34/1.00. The contract is due to settle on
February 27, 2009. This currency forward contract hedges an intercompany loan. Most of our German
plants operating expenses will be in euro, creating increasing opportunities for some natural
hedges against the currency risk in our net sales. In addition, we may decide to enter into other
hedging activities in the future.
Interest Rate Risk
26
We are exposed to interest rate risk because many of our end-users depend on debt financing to
purchase and install a photovoltaic system. Although the useful life of a photovoltaic system is
approximately 25 years, end-users of our solar modules must pay the entire cost of the photovoltaic
system at the time of installation. As a result, many of our end-users rely on debt financing to
fund their up-front capital expenditures and final project. An increase in interest rates could
make it difficult for our end-users to secure the financing necessary to purchase and install a
photovoltaic system on favorable terms, or at all and thus lower demand for our solar modules and
reduce our net sales. In addition, we believe that a significant percentage of our end-users
install photovoltaic systems as an investment, funding the initial capital expenditures through a
combination of equity and debt. An increase in interest rates could lower an investors return on
investment in a photovoltaic system or make alternative investments more attractive relative to
photovoltaic systems, which, in each case, could cause these end-users to seek alternative
investments that promise higher returns.
During July 2006, we entered into the IKB credit facility, which bears interest at Euribor
plus 1.6% for the term loan, Euribor plus 2.0% for the bridge loan and Euribor plus 1.8% for the
revolving credit facility. As of June 30, 2007, we held six pay fixed, receive Euribor interest
rate swaps with a combined notional value of 46.0 million ($59.8 million at an assumed exchange
rate of $1.30/1.00), which hedge our interest rate risk on the IKB term loan.
In addition, we invest some of our cash in debt and equity securities, which exposes us to
interest rate risk. The primary objective of our investment activities is to preserve principal,
while at the same time maximizing the income we receive from our investments without significantly
increasing risk. Some of the securities in which we invest may be subject to market risk. This
means that a change in prevailing interest rates may cause the principal amount of the investment
to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the
then-prevailing rate and the prevailing interest rate later rises, the principal amount of our
investment may decline. To minimize this risk, we maintain our portfolio of cash equivalents and
marketable securities in a variety of securities, including money market funds, government and
non-government debt securities and certificates of deposit. The risk associated with fluctuating
interest rates is limited to our investment portfolio and we do not believe that a 10% change in
interest rates will have a significant impact on our consolidated statements of operations and
statements of cash flow. As of June 30, 2007, all of our
investments were in money market accounts or tax-exempt U.S.
government securities, including obligations of states and political
subdivisions.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation as of June 30, 2007 of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as of June 30, 2007, our disclosure
controls and procedures were effective to ensure that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in rules and forms of the SEC, and is accumulated and
communicated to our management as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of our internal control over financial reporting as defined in Exchange Act Rule
13a-15(f) to determine whether any changes in our internal control over financial reporting
occurred during the second quarter of fiscal 2007 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. Based on that
evaluation, there have been no such changes in our internal control over financial reporting during
the first six months of fiscal 2007.
27
CEO and CFO Certifications
We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our
Chief Executive Officer and Chief Financial Officer, which are required in accordance with the
Exchange Act. We recommend that this Item 4T be read in conjunction with the certifications for a
more complete understanding of the subject matter presented.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives are being met. Further, the design of any
control systems must reflect the fact that there are resource constraints, and the benefits of all
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Control systems can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
NASD Inquiry
On August 1, 2007 we received a letter from the NASD Market Regulation
Department (the NASD) requesting certain information in connection with the NASDs review of
trading in our common stock surrounding our July 9, 2007 announcement of having entered into new
long-term supply contracts. Among other things, the NASD requested information about all persons
who possessed information about the new long-term supply contracts prior to our public disclosure,
a chronology of all significant events leading to the execution of the new long-term supply
contracts and a description of our procedures to ensure the confidentiality of material, non-public
information prior to its public dissemination. The letter states that the inquiry should not be
construed as an indication that the NASD has determined that any violations of the NASD Conduct
Rules or the federal securities laws have occurred. We are cooperating with the NASD and are not
aware of any inappropriate disclosure or improper trading.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A: Risk Factors in our Annual Report on Form 10-K for the
year ended December 30, 2006 and our registration statement on
Form S-1 filed on July 19, 2007, which
could materially affect our business, financial condition or future results. The risks described in
our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition or future results. The risk factors
included in our Annual Report on Form 10-K for the year ended December 30, 2006 and our
registration statement on Form S-1 filed on July 19, 2007, have not materially changed.
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2007 Annual Meeting of Stockholders on May 25, 2007. At the meeting, our stockholders
voted on the following two proposals and cast their votes as follows to approve such proposals:
Proposal 1: To elect the following six nominees to First Solars board of directors, each to serve
on our board of directors until the next annual meeting of stockholders or until his successor has
been elected and qualified:
28
|
|
|
|
|
|
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Nominee |
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For |
|
Withheld |
Michael J. Ahearn |
|
|
62,324,159 |
|
|
|
7,806,037 |
|
Bruce Sohn |
|
|
62,183,505 |
|
|
|
7,946,691 |
|
James F. Nolan |
|
|
61,821,122 |
|
|
|
8,309,074 |
|
J. Thomas Presby |
|
|
68,922,678 |
|
|
|
1,207,518 |
|
Paul H. Stebbins |
|
|
68,986,397 |
|
|
|
1,143,799 |
|
Michael Sweeney |
|
|
69,112,725 |
|
|
|
1,017,471 |
|
Proposal 2: To ratify the appointment of PricewaterhouseCoopers LLP as First Solars independent
registered public accounting firm for the fiscal year ending December 29, 2007:
|
|
|
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
70,018,786 |
|
|
88,484 |
|
|
|
22,926 |
|
Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
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|
Exhibit |
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|
|
Incorporated by Reference |
|
|
|
|
|
Filed |
Number |
|
Exhibit Description |
|
Form |
|
Date of First Filing |
|
File Number |
|
Exhibit Number |
|
Herewith |
3.1
|
|
Amended and Restated
Certificate of
Incorporation of First
Solar Inc.
|
|
S-1/A
|
|
10/25/06
|
|
333-135574
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
By-Laws of First Solar Inc.
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|
S-1/A
|
|
11/2/06
|
|
333-135574
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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31.01
|
|
Certification of Chief
Executive Officer pursuant
to 15 U.S.C. Section 7241,
as adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
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|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.02
|
|
Certification of Chief
Financial Officer pursuant
to 15 U.S.C. Section 7241,
as adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
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|
|
|
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|
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|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.01*
|
|
Certification of Chief
Executive Officer and
Chief Financial Officer
pursuant to 18 U.S.C.
Section 1350, as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
29
|
|
|
* |
|
This exhibit shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor
shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in any filings. |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
FIRST SOLAR, INC. |
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By:
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/s/ JENS MEYERHOFF |
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|
|
Jens Meyerhoff |
|
|
|
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Chief Financial Officer |
|
|
|
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|
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(Principal Financial Officer and |
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|
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Duly Authorized Officer) |
|
|
August 3, 2007
31
EXHIBIT INDEX
|
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|
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|
|
Exhibit |
|
|
|
Incorporated by Reference |
|
|
|
|
|
Filed |
Number |
|
Exhibit Description |
|
Form |
|
Date of First Filing |
|
File Number |
|
Exhibit Number |
|
Herewith |
3.1
|
|
Amended and Restated
Certificate of
Incorporation of First
Solar Inc.
|
|
S-1/A
|
|
10/25/06
|
|
333-135574
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
By-Laws of First Solar Inc.
|
|
S-1/A
|
|
11/2/06
|
|
333-135574
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.01
|
|
Certification of Chief
Executive Officer pursuant
to 15 U.S.C. Section 7241,
as adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
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|
X |
|
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31.02
|
|
Certification of Chief
Financial Officer pursuant
to 15 U.S.C. Section 7241,
as adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.01*
|
|
Certification of Chief
Executive Officer and
Chief Financial Officer
pursuant to 18 U.S.C.
Section 1350, as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
* |
|
This exhibit shall not be deemed filed for purposes of Section 18 of
the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor
shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of
any general incorporation language in any filings. |
32