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 September 29, 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 $0.001, outstanding as of
November 5, 2007 was 77,955,278 shares.
FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2007
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 29, |
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September 30, |
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September 29, |
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2006 |
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2007 |
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2006 |
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2007 |
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Net sales |
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$ |
40,794 |
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$ |
159,007 |
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$ |
82,279 |
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$ |
303,179 |
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Cost of sales |
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24,537 |
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76,967 |
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53,650 |
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162,726 |
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Gross profit |
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16,257 |
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82,040 |
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28,629 |
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140,453 |
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Operating expenses: |
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Research and development |
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1,657 |
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3,854 |
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4,712 |
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10,675 |
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Selling, general and administrative |
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8,393 |
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27,082 |
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22,398 |
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58,057 |
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Production start-up |
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1,109 |
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2,805 |
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7,750 |
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12,802 |
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Total operating expenses |
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11,159 |
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33,741 |
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34,860 |
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81,534 |
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Operating income (loss) |
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5,098 |
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48,299 |
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(6,231 |
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58,919 |
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Foreign currency gain (loss) |
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(298 |
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965 |
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2,792 |
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716 |
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Interest income |
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312 |
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5,298 |
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893 |
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13,199 |
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Interest expense |
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(158 |
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(647 |
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(866 |
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(2,131 |
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Other expense, net |
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(481 |
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(266 |
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(471 |
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(881 |
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Income (loss) before income taxes |
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4,473 |
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53,649 |
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(3,883 |
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69,822 |
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Income tax benefit (expense) |
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(181 |
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(7,615 |
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(181 |
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25,658 |
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Net income (loss) |
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$ |
4,292 |
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$ |
46,034 |
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$ |
(4,064 |
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$ |
95,480 |
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Net income (loss) per share: |
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Basic |
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$ |
0.08 |
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$ |
0.61 |
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$ |
(0.08 |
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$ |
1.30 |
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Diluted |
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$ |
0.07 |
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$ |
0.58 |
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$ |
(0.08 |
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$ |
1.24 |
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Weighted-average number of shares used in per share calculations: |
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Basic |
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56,137 |
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75,666 |
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53,757 |
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73,537 |
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Diluted |
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57,956 |
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79,088 |
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53,757 |
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76,856 |
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See accompanying notes to these condensed consolidated financial statements.
3
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
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December 30, |
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September 29, |
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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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$ |
117,153 |
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Marketable securities |
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323 |
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564,641 |
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Accounts receivable, net |
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27,123 |
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19,660 |
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Inventories |
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16,510 |
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31,887 |
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Economic development funding receivable |
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27,515 |
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34,323 |
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Deferred tax asset, net current |
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3,752 |
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Prepaid expenses and other current assets |
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8,959 |
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24,369 |
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Total current assets |
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388,522 |
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795,785 |
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Property, plant and equipment, net |
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178,868 |
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317,552 |
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Restricted investments |
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8,224 |
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14,458 |
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Deferred tax asset, net noncurrent |
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45,071 |
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Other noncurrent assets |
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2,896 |
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4,290 |
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Total assets |
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$ |
578,510 |
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$ |
1,177,156 |
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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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$ |
23,713 |
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Current portion of long-term debt |
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3,311 |
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9,900 |
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Accounts payable and accrued expenses |
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32,083 |
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69,465 |
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Other current liabilities |
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340 |
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9,111 |
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Total current liabilities |
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52,073 |
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112,189 |
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Accrued recycling |
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3,724 |
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9,424 |
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Long-term debt |
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61,047 |
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72,484 |
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Other noncurrent liabilities |
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2,240 |
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Total liabilities |
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116,844 |
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196,337 |
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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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Stockholders equity: |
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Common stock, $0.001 par value per share;
500,000,000 shares authorized; 72,331,964
and 77,950,515 shares issued and outstanding
at December 30, 2006 and September 29, 2007,
respectively |
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72 |
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78 |
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Additional paid-in capital |
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555,749 |
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1,026,856 |
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Accumulated deficit |
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(145,403 |
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(49,979 |
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Accumulated other comprehensive income |
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1,022 |
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3,864 |
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Total stockholders equity |
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411,440 |
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980,819 |
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Total liabilities and stockholders equity |
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$ |
578,510 |
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$ |
1,177,156 |
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See accompanying notes to these condensed consolidated financial statements.
4
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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September 29, |
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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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$ |
58,496 |
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$ |
309,837 |
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Cash paid to suppliers and employees |
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(72,638 |
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(172,169 |
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Interest, net of amounts capitalized |
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334 |
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5,672 |
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Income tax |
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(3 |
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(18,191 |
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Excess tax benefit from share-based compensation arrangements |
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(18,600 |
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Other |
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(92 |
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(304 |
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Net cash provided by (used in) operating activities |
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(13,903 |
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106,245 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(98,049 |
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(145,635 |
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Purchase of marketable securities |
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(726,581 |
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Proceeds from maturities and sales of marketable securities |
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162,395 |
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Purchases of restricted investments |
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(5,467 |
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(5,908 |
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Other investments in long-term assets |
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(40 |
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Net cash used in investing activities |
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(103,556 |
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(715,729 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net of offering costs |
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365,969 |
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Proceeds from notes payable to a related party |
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36,000 |
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Repayment of notes payable to a related party |
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(38,700 |
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Repayment of long-term debt |
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(29,966 |
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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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6,745 |
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Proceeds from issuance of debt |
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98,252 |
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48,160 |
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Debt issuance costs |
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(1,497 |
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Excess tax benefit from share-based compensation arrangements |
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18,600 |
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Proceeds from economic development funding |
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8,059 |
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6,601 |
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Other financing activities |
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7 |
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(3 |
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Net cash provided by financing activities |
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132,221 |
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416,106 |
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Effect of exchange rate changes on cash and cash equivalents |
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(110 |
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2,439 |
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Net increase (decrease) in cash and cash equivalents |
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14,652 |
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(190,939 |
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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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$ |
31,373 |
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$ |
117,153 |
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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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$ |
15,540 |
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$ |
16,677 |
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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)
Nine Months Ended September 29, 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 (U.S. GAAP) for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities and Exchange Commission. Accordingly, 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 nine months ended September 29, 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 U.S. GAAP for complete financial statements. These financial statements and notes
should be read in conjunction with the financial statements and notes thereto for the year ended
December 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
Statement of Financial Accounting Standards (SFAS) No.115, Accounting for Certain Investments in
Debt and Equity Securities in the second quarter of fiscal 2007.
In addition, we implemented a cash management system in the third quarter of fiscal 2007.
Under this system, checks issued but not presented to banks frequently result in book overdraft
balances for accounting purposes, which we classify within accounts payable on our balance sheet.
Changes in book overdrafts are reported on our condensed consolidated statement of cash flows as a
component of operating cash flows associated with accounts payable as they do not represent actual
bank overdrafts. The amount of these checks included in accounts payable as of September 29, 2007
was $3.5 million.
Note 3 Initial Public Offering
The Securities and Exchange Commission declared our first registration statements effective on
November 16, 2006, which we filed on Form 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 our common stock. Under these registration statements, we registered
22,942,500 shares of our common stock, including 2,942,500 subject to an underwriters
over-allotment option. We registered 16,192,500 of these shares on our own behalf and 6,750,000 of
these shares on behalf of certain of our stockholders, including one of our executive officers. In
November 2006, we completed our initial public offering, in which we sold all of these shares that
we registered on our 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, we received gross
proceeds of $323.9 million, against which we 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 our
paid-in capital of $302.7 million. The remaining
6
$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 Follow-On Public Offering
The Securities and Exchange Commission declared, effective on August 9, 2007, our follow-on
registration statement, which we filed on Form S-1/A (Registration No. 333-144714) under the
Securities Act of 1933 in connection with the follow-on public offering of our common stock. Under
this registration statement, we and certain of our stockholders offered 6,500,000 shares of our
common stock, with an aggregate public offering price of $617.5 million. We registered 4,000,000 of
these shares on our behalf and 2,500,000 of these shares on behalf of certain of our stockholders,
including certain of our executive officers, two of which are also directors of ours. In addition,
a selling stockholder had granted the underwriters the right to purchase up to an additional
975,000 shares of common stock to cover over-allotments.
On August 13, 2007, we completed our follow-on offering in which we sold 4,000,000 shares of
our common stock and the selling stockholders sold 2,500,000 shares of our common stock. The sale
of shares of our common stock resulted in aggregate gross proceeds of approximately $380.0 million,
approximately $14.0 million of which we applied to underwriting discounts and commissions. As a
result, we received approximately $366.0 million of the offering proceeds.
The sale of 2,500,000 shares of common stock by the selling stockholders resulted in aggregate
gross proceeds of approximately $237.5 million, of which $8.9 million was applied to underwriting
discounts and commissions. As a result, the selling stockholders received approximately $228.6
million of the offering proceeds.
On August 30, 2007 a selling stockholder sold 850,000 shares at $91.4375 per share pursuant to
the exercise of the over-allotment options by the underwriters.
Note 5 Economic Development Funding
On July 26, 2006, we were approved to receive taxable investment incentives
(Investitionszuschüsse) of approximately 21.5 million ($30.1 million at an assumed exchange rate
of $1.40/1.00) from the State of Brandenburg, Germany. These funds will reimburse us for certain
costs we incurred building our plant in Frankfurt/Oder, Germany, including costs for the
construction of buildings and the purchase of machinery and equipment. Receipt of these incentives
is conditional upon the State of Brandenburg having sufficient funds allocated to this program to
pay the reimbursements we claim. In addition, we are required to operate our facility for a minimum
of five years and employ a specified number of employees during this period. Our incentive approval
expires on December 31, 2009. As of September 29, 2007, we had received cash payments of $28.6
million under this program and we had accrued an additional $1.1 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 ($33.3 million at an assumed
exchange rate of $1.40/1.00) 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 this act, we claimed
reimbursement under the act in conjunction with the filing of our tax returns with the local German
tax office during the third quarter of fiscal 2007. In addition, this program expired on December
31, 2006 and we can only claim reimbursement for investments completed by that date. The majority
of our buildings and structures and our investment in machinery and equipment were completed by
this date. As of September 29, 2007, we had accrued $33.2 million that we are eligible to receive
under this program based on qualifying expenditures that we had incurred through the expiration
date.
Note 6 Marketable Securities
Marketable securities at September 29, 2007 consisted of the following (in thousands):
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Obligations of states and political subdivisions |
|
$ |
564,606 |
|
|
$ |
35 |
|
|
$ |
|
|
|
$ |
564,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,606 |
|
|
$ |
35 |
|
|
$ |
|
|
|
$ |
564,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized gains on our investments as of September 29, 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, limits the concentration as to security holder and limits the
duration of the investment.
We determined market values 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 our ability and intent to hold the investment for a period
of time, which may be sufficient for anticipated recovery in market value and which may be to
maturity.
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 7 Consolidated Balance Sheet Details
Accounts receivable, net
Accounts receivable, net consisted of the following at December 30, 2006 and September 29,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Accounts receivable, gross |
|
$ |
27,127 |
|
|
$ |
19,660 |
|
Allowance for doubtful accounts |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
27,123 |
|
|
$ |
19,660 |
|
|
|
|
|
|
|
|
Inventories
Inventories consisted of the following at December 30, 2006 and September 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Raw materials |
|
$ |
8,212 |
|
|
$ |
18,065 |
|
Work in process |
|
|
1,123 |
|
|
|
3,020 |
|
Finished goods |
|
|
7,175 |
|
|
|
10,802 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
16,510 |
|
|
$ |
31,887 |
|
|
|
|
|
|
|
|
8
Property, plant and equipment
Property, plant and equipment consisted of the following at December 30, 2006 and September
29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Buildings and improvements |
|
$ |
21,804 |
|
|
$ |
44,152 |
|
Machinery and equipment |
|
|
79,803 |
|
|
|
161,512 |
|
Office equipment and furniture |
|
|
4,428 |
|
|
|
6,930 |
|
Leasehold improvements |
|
|
3,086 |
|
|
|
3,880 |
|
|
|
|
|
|
|
|
Gross depreciable property, plant and equipment |
|
|
109,121 |
|
|
|
216,474 |
|
Accumulated depreciation and amortization |
|
|
(18,880 |
) |
|
|
(36,358 |
) |
|
|
|
|
|
|
|
Net depreciable property, plant and equipment |
|
|
90,241 |
|
|
|
180,116 |
|
Land |
|
|
2,836 |
|
|
|
2,984 |
|
Construction in progress |
|
|
85,791 |
|
|
|
134,452 |
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
$ |
178,868 |
|
|
$ |
317,552 |
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment was $3.1 million and $6.6
million for the three months ended September 30, 2006 and September 29, 2007, respectively, and was
$6.5 million and $17.8 million for the nine months ended September 30, 2006 and September 29, 2007,
respectively.
We incurred and capitalized interest expense (into our property, plant and equipment) as
follows during the three and nine months ended September 30, 2006 and September 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Interest expense incurred |
|
$ |
819 |
|
|
$ |
1,742 |
|
|
$ |
3,292 |
|
|
$ |
4,264 |
|
Interest capitalized |
|
|
(661 |
) |
|
|
(1,095 |
) |
|
|
(2,426 |
) |
|
|
(2,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
158 |
|
|
$ |
647 |
|
|
$ |
866 |
|
|
$ |
2,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following at December 30, 2006 and
September 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Accounts payable |
|
$ |
14,001 |
|
|
$ |
14,883 |
|
Product warranty liability |
|
|
2,764 |
|
|
|
5,496 |
|
Income tax payable |
|
|
5,152 |
|
|
|
429 |
|
Accrued compensation and benefits |
|
|
2,642 |
|
|
|
14,529 |
|
Accrued property, plant and equipment |
|
|
1,968 |
|
|
|
19,806 |
|
Other accrued expenses |
|
|
5,556 |
|
|
|
14,322 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
32,083 |
|
|
$ |
69,465 |
|
|
|
|
|
|
|
|
Note 8 Share-Based Compensation
We measure share-based compensation cost based on the fair value of the award on the grant
date 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 nine months ended September 30, 2006 and September 29, 2007 was as follows (in thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Share-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
1,147 |
|
|
$ |
2,585 |
|
|
$ |
3,409 |
|
|
$ |
6,505 |
|
Research and development |
|
|
600 |
|
|
|
940 |
|
|
|
1,790 |
|
|
|
3,593 |
|
Selling, general and administrative |
|
|
983 |
|
|
|
12,472 |
|
|
|
2,962 |
|
|
|
18,210 |
|
Production start-up |
|
|
|
|
|
|
433 |
|
|
|
|
|
|
|
898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,730 |
|
|
$ |
16,430 |
|
|
$ |
8,161 |
|
|
$ |
29,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in share-based compensation expense was primarily the result of new awards, some
of which vested upon grant.
The following table presents our share-based compensation expense by type of award for the
three and nine months ended September 30, 2006 and September 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Stock options |
|
$ |
2,670 |
|
|
$ |
5,940 |
|
|
$ |
8,036 |
|
|
$ |
18,600 |
|
Restricted stock units |
|
|
|
|
|
|
10,657 |
|
|
|
|
|
|
|
10,699 |
|
Unrestricted stock |
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
216 |
|
Net amount absorbed into inventory |
|
|
60 |
|
|
|
(225 |
) |
|
|
125 |
|
|
|
(309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,730 |
|
|
$ |
16,430 |
|
|
$ |
8,161 |
|
|
$ |
29,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation cost capitalized in our inventory was $0.2 million and $0.5 million
at September 30, 2006 and September 29, 2007, respectively. At September 29, 2007, we had $17.8
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 1.6
years, and $30.1 million of unrecognized share-based compensation cost related to unvested
restricted stock units, which we expect to recognize as an expense over a weighted-average period
of approximately 2.6 years.
Note 9 Debt
Our long-term debt consisted of the following at December 30, 2006 and September 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Euro denominated loan, variable interest
Euribor plus 1.6%, due 2008 through 2012 |
|
$ |
45,216 |
|
|
$ |
65,657 |
|
2.25% loan, due 2006 through 2015 |
|
|
14,865 |
|
|
|
13,640 |
|
0.25% 3.25% loan, due 2007 through 2009 |
|
|
5,000 |
|
|
|
3,749 |
|
Capital lease obligations |
|
|
15 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
65,096 |
|
|
|
83,057 |
|
Less unamortized discount |
|
|
(738 |
) |
|
|
(673 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
|
64,358 |
|
|
|
82,384 |
|
Less current portion |
|
|
(3,311 |
) |
|
|
(9,900 |
) |
|
|
|
|
|
|
|
Non-current portion |
|
$ |
61,047 |
|
|
$ |
72,484 |
|
|
|
|
|
|
|
|
We had outstanding borrowings of $16.3 million and $23.7 million at December 30, 2006 and
September 29, 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.
On September 28, 2007, we established an irrevocable letter of credit between our subsidiary
First Solar Malaysia SDN BHD and NUR Distribution SDN BHD, which is the local utility provider for
our plant in Malaysia. This letter of credit relates to an electricity supply agreement with NUR
Distribution SDN BHD dated September 21, 2007 and expires on December 30, 2008. The letter of
credit renews annually and is secured by a bank guarantee in the amount of $0.7 million.
10
Note 10 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 nine months ended September 30, 2006 and
September 29, 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Product warranty liability, beginning of period |
|
$ |
2,089 |
|
|
$ |
4,050 |
|
|
$ |
1,853 |
|
|
$ |
2,764 |
|
Accruals for new warranties issued (warranty expense) |
|
|
443 |
|
|
|
1,554 |
|
|
|
897 |
|
|
|
3,103 |
|
Settlements |
|
|
(71 |
) |
|
|
(176 |
) |
|
|
(249 |
) |
|
|
(188 |
) |
Change in estimate of warranty liability |
|
|
(9 |
) |
|
|
68 |
|
|
|
(49 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product warranty liability, end of period |
|
$ |
2,452 |
|
|
$ |
5,496 |
|
|
$ |
2,452 |
|
|
$ |
5,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 Income Taxes
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 income 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 nine months ended September 29,
2007, we had no material changes in unrecognized tax benefits that, if recognized, would affect the
effective tax rate. During the nine months ended September 29, 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 September 29, 2007, we had a valuation allowance on our net deferred tax assets
in all of the non-U.S. 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 September 29, 2007, we concluded that
it was more-likely-than-not that $8.2 million of non-U.S. net deferred tax assets against which we
had previously held a full valuation allowance would be realized
11
during future periods. The
reversal of the $8.2 million of valuation allowances was based upon managements assessment of the
available evidence at September 29, 2007. As of June 30, 2007, we concluded that it was
more-likely-than-not that $42.4 million of U.S. net deferred tax assets against which we had previously held a full valuation allowance
would be realized during future periods. As a result of the reversal $39.2 million was realized in
the period ending June 30, 2007. The reversal of the $42.4 million of valuation allowances was based
upon managements assessment of the available evidence at June 30, 2007.
The available positive evidence included cumulative non-U.S. taxable income for the previous
12 quarters and a projection of future taxable income. Primarily as a result of the reversal of the
U.S. and non-U.S. valuation allowances during the nine months ended September 29, 2007, we recorded
tax benefits of $7.5 million on our condensed consolidated statement of operations for the three
months ended September 29, 2007, which were offset by tax expenses of $15.1 million on our
operations for that period and we recorded tax benefits of $46.7 million on our condensed
consolidated statement of operations for the nine months ended September 29, 2007, which were
partially offset by tax expenses of $21.0 million on our operations for that period.
Note 12 Income (loss) per share
Basic net income (loss) per share is computed by dividing net income (loss) 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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Basic net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,292 |
|
|
$ |
46,034 |
|
|
$ |
(4,064 |
) |
|
$ |
95,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding |
|
|
56,137 |
|
|
|
75,666 |
|
|
|
52,879 |
|
|
|
73,537 |
|
Effect of rights issue |
|
|
|
|
|
|
|
|
|
|
878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income
(loss) per share |
|
|
56,137 |
|
|
|
75,666 |
|
|
|
53,757 |
|
|
|
73,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income
(loss) per share |
|
|
56,137 |
|
|
|
75,666 |
|
|
|
53,757 |
|
|
|
73,537 |
|
Effect of stock options and restricted stock units outstanding |
|
|
1,819 |
|
|
|
3,422 |
|
|
|
|
|
|
|
3,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing diluted net income
(loss) per share |
|
|
57,956 |
|
|
|
79,088 |
|
|
|
53,757 |
|
|
|
76,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following number of outstanding options were excluded from the computation of diluted net
income (loss) per share as they would have had an antidilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
Options to purchase
common stock and
restricted stock
units |
|
|
3,307 |
|
|
|
2,339 |
|
|
|
5,175 |
|
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 Comprehensive Income (Loss)
Comprehensive income (loss), which 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, is as follows (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Net income (loss) |
|
$ |
4,292 |
|
|
$ |
46,034 |
|
|
$ |
(4,064 |
) |
|
$ |
95,480 |
|
Foreign currency translation adjustments |
|
|
(10 |
) |
|
|
2,203 |
|
|
|
(110 |
) |
|
|
2,543 |
|
Change in
unrealized gain on marketable securities, net of tax |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
21 |
|
Change in unrealized gain (loss) on derivative instruments, net of tax |
|
|
(153 |
) |
|
|
(558 |
) |
|
|
(153 |
) |
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
4,129 |
|
|
$ |
47,701 |
|
|
$ |
(4,327 |
) |
|
$ |
98,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Foreign currency translation adjustments |
|
$ |
1,002 |
|
|
$ |
3,545 |
|
Unrealized
gain on marketable securities, net of tax |
|
|
|
|
|
|
21 |
|
Unrealized gain on derivative instruments, net of tax |
|
|
20 |
|
|
|
298 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
1,022 |
|
|
$ |
3,864 |
|
|
|
|
|
|
|
|
Note 14 Statement of Cash Flows
Following is a reconciliation of net income (loss) to net cash provided by (used in) operating
activities for the nine months ended September 30, 2006 and September 29, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 29, |
|
|
|
2006 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(4,064 |
) |
|
$ |
95,480 |
|
Adjustment to reconcile net income (loss) to cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,512 |
|
|
|
17,681 |
|
Share-based compensation |
|
|
8,161 |
|
|
|
29,206 |
|
Deferred income taxes |
|
|
|
|
|
|
(49,031 |
) |
Excess tax benefit from share-based compensation arrangements |
|
|
|
|
|
|
(18,600 |
) |
Loss on disposal of property and equipment |
|
|
243 |
|
|
|
299 |
|
Non-cash interest |
|
|
397 |
|
|
|
(3 |
) |
Non-cash loss |
|
|
45 |
|
|
|
|
|
Provision for excess and obsolete inventories |
|
|
|
|
|
|
278 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(25,335 |
) |
|
|
6,256 |
|
Inventories |
|
|
(3,734 |
) |
|
|
(14,455 |
) |
Prepaid expenses and other current assets |
|
|
(3,308 |
) |
|
|
(6,030 |
) |
Other non-current assets |
|
|
22 |
|
|
|
(2,211 |
) |
Accounts payable and accrued expenses |
|
|
7,158 |
|
|
|
47,375 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(9,839 |
) |
|
|
10,765 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(13,903 |
) |
|
$ |
106,245 |
|
|
|
|
|
|
|
|
Note 15 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 September
29, 2007, the notional values of the interest rate swaps (in thousands) and their annual fixed
payment rates and maturities were as follows:
13
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Fixed Rate |
|
Maturity |
14,921 ($20,889 at an assumed exchange rate of
$1.40/1.00) |
|
|
3.96 |
% |
|
December 2012 |
9,902 ($13,863 at an assumed exchange rate of $1.40/1.00) |
|
|
4.03 |
% |
|
December 2012 |
3,928 ($5,499 at an assumed exchange rate of $1.40/1.00) |
|
|
4.07 |
% |
|
December 2012 |
10,685 ($14,959 at an assumed exchange rate of
$1.40/1.00) |
|
|
4.29 |
% |
|
December 2012 |
3,248 ($4,547 at an assumed exchange rate of $1.40/1.00) |
|
|
4.25 |
% |
|
December 2012 |
3,363 ($4,708 at an assumed exchange rate of $1.40/1.00) |
|
|
4.55 |
% |
|
December 2012 |
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
report the aggregate fair value of the interest rate swap agreements of $0.5 million on September
29, 2007 on our balance sheet ($0.1 million of which was an other current asset and $0.4 million of
which was an other noncurrent asset), and we record changes in that fair value in other
comprehensive income. We determined that the interest rate swap agreements were highly effective
cash flow hedges at September 29, 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 nine months ended September 29, 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.
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 September 29, 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 on this contract in the three and nine
months ended September 29, 2007 were $1.3 million and $1.8 million, respectively. The contract is
scheduled to settle on February 27, 2009.
Note 16 Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. This statement is effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the impact of adopting SFAS 157 on our consolidated financial position and
results of operations.
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.
Note 17 Subsequent Events
On October 15, 2007 we signed a lease for approximately 28,000 square feet of corporate office
space in Tempe, Arizona. The lease will commence on or about March 1, 2008 and will expire after 7
years and 4 months, subject to an option to extend the term for another 5 years. The total rent
obligation over the initial term of the lease is approximately $8.4 million and will be accounted
for as an operating lease.
On October 16, 2007 we established an irrevocable letter of credit between our subsidiary
First Solar Malaysia SDN BHD and Royal Malaysian Customs. This letter of credit is issued for
payments of customs tax, excise tax and sales tax to the Royal Malaysian Customs and Excise
Department. The letter of credit expires on September 30, 2008 and is secured by a bank guarantee
in the amount of MRY 4.0 million ($1.2 million at an assumed exchange rate of $0.30/MRY 1.00).
On November 5, 2007, we announced that we entered into two new agreements for the manufacture
and sale of solar modules totaling 557 Megawatts. These new agreements are expected to allow for
sales of approximately $1 billion at an assumed future exchange rate of $1.30/ 1.00 over the period
2008 to 2012. The agreements are long-term agreements with Babcock & Brown
14
Enexon Trading Ltd., a subsidiary of the global investment and advisory firm Babcock & Brown International Pty Ltd, which
focuses on developing real estate, infrastructure, and renewable energy projects; and Ecostream
Switzerland GmbH, a subsidiary of Econcern BV, which focuses on developing solutions for
sustainable energy supply.
On
November 1, 2007 we exercised our option under the lease agreement dated January 24, 2007
between First Solar Malaysia Sdn. Bhd. and Kulim Technology Park Corporation Berhad for lands that
are the site of our third and fourth plants at our Malaysian manufacturing center, adjacent to the
first two plants that are currently under construction.
On November 1, 2007 we entered into 13 month foreign exchange forward contracts to hedge
133.6 million
of forecasted revenues. The total aggregate contract amount is $192.8 million. These
contracts will qualify as hedges for accounting purposes under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, and will become due between December 2007 and December 2008.
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,
the negative or plural of these words and other comparable terminology. Forward-looking statements
are only predictions based on our current expectations and our projections about future events. All
forward-looking statements included in this quarterly report on Form 10-Q are based upon
information available to us as of the filing date of this quarterly report on Form 10-Q. You should
not place undue reliance on these forward-looking statements. We undertake no obligation to update
any of these forward-looking statements for any reason. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance, or achievements to differ materially from those expressed or implied by
these statements. These factors include the matters discussed in the section entitled Risk
Factors elsewhere in this quarterly report on Form 10-Q. You should carefully consider the risks
and uncertainties described under this section.
The following discussion and analysis should be read in conjunction with our condensed
consolidated financial statements and the accompanying notes contained in this quarterly report on
Form 10-Q. Unless expressly stated or the context otherwise requires, the terms we, our, us
and First Solar refer to First Solar, Inc. and its subsidiaries.
Overview
We design and manufacture solar modules using a proprietary thin film semiconductor technology
that has allowed us to reduce our average solar module manufacturing costs to among the lowest in
the world. Each solar module uses a thin layer of cadmium telluride semiconductor material to
convert sunlight into electricity. We manufacture our solar modules on a high-throughput production
line and we perform all manufacturing steps ourselves in an automated, proprietary and continuous
process. In 2006 and the first nine months of 2007, we sold almost all of our solar modules to
solar project developers and system integrators headquartered in Germany, France and Spain.
First Solar was founded in 1999 to bring an advanced thin film semiconductor process into
commercial production through the acquisition of predecessor technologies and the initiation of a
research, development and production program that allowed us to improve upon the predecessor
technologies and launch commercial operations in January 2002. Currently, we manufacture our solar
modules and conduct our research and development activities at our Perrysburg, Ohio and
Frankfurt/Oder, Germany manufacturing
15
facilities. We completed the qualification of our base plant
in Perrysburg, Ohio for high volume production in November 2004. In April 2007, we also started initial production at a 120MW manufacturing facility in Germany,
which reached full capacity in the third quarter of 2007. In April 2007, we began construction of
plant one of our Malaysian manufacturing centers and construction of plant two began in the third
quarter of 2007. We also plan to begin construction of plant three of our Malaysian manufacturing
center 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.
On February 22, 2006, we converted 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 all of 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 nine 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, France and Spain,
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 contracts
for the purchase and sale of our solar modules with twelve 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 charge representing a
percentage of the delinquent revenue. If we do not meet our annual minimum volume shipments, our
customers also have the right to terminate these contracts on a prospective basis.
No single customer accounted for more than 21% of our net sales in the nine months ended
September 29, 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 in our cost of sales.
16
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
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.
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 a general trend of increases in these expenses 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 that are 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 our German plant and
our plants at our 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 than
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 income
Interest income is associated with our cash, cash equivalents and marketable securities.
Interest expense
Interest expense is associated with various debt financings.
Use of estimates
17
Our discussion and analysis of our financial condition and results of operations are based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with U.S. GAAP for interim financial information. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets, liabilities, net sales and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
those related to inventories, intangible assets, income taxes, warranty obligations, marketable
securities, end of life reclamation and recycling, contingencies and
litigation and share-based
compensation. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources.
Results of Operations
The following table sets forth our consolidated statement of operations as a percentage of net
sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
60.1 |
% |
|
|
48.4 |
% |
|
|
65.2 |
% |
|
|
53.7 |
% |
Gross profit |
|
|
39.9 |
% |
|
|
51.6 |
% |
|
|
34.8 |
% |
|
|
46.3 |
% |
Research and development |
|
|
4.1 |
% |
|
|
2.4 |
% |
|
|
5.7 |
% |
|
|
3.5 |
% |
Selling, general and administrative |
|
|
20.6 |
% |
|
|
17.0 |
% |
|
|
27.2 |
% |
|
|
19.1 |
% |
Production start-up |
|
|
2.7 |
% |
|
|
1.8 |
% |
|
|
9.5 |
% |
|
|
4.3 |
% |
Operating income (loss) |
|
|
12.5 |
% |
|
|
30.4 |
% |
|
|
(7.6 |
)% |
|
|
19.4 |
% |
Foreign currency gain (loss) |
|
|
(0.7 |
)% |
|
|
0.6 |
% |
|
|
3.4 |
% |
|
|
0.2 |
% |
Interest income |
|
|
0.8 |
% |
|
|
3.3 |
% |
|
|
1.1 |
% |
|
|
4.4 |
% |
Interest expense |
|
|
(0.4 |
)% |
|
|
(0.4 |
)% |
|
|
(1.0 |
)% |
|
|
(0.7 |
)% |
Other expense, net |
|
|
(1.2 |
)% |
|
|
(0.1 |
)% |
|
|
(0.6 |
)% |
|
|
(0.3 |
)% |
Income tax benefit (expense) |
|
|
(0.5 |
)% |
|
|
(4.8 |
)% |
|
|
(0.2 |
)% |
|
|
8.5 |
% |
Net income (loss) |
|
|
10.5 |
% |
|
|
29.0 |
% |
|
|
(4.9 |
)% |
|
|
31.5 |
% |
Three Months Ended September 30, 2006 and September 29, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Net sales |
|
$ |
40,794 |
|
|
$ |
159,007 |
|
|
$ |
118,213 |
|
|
|
290 |
% |
The increase in our net sales was due primarily to a 280% increase in the MW volume of solar
modules sold in the third quarter of 2007 compared with the third quarter of 2006. We were able to
increase the MW volume of solar modules sold primarily as a result of the production ramp at our
German plant, the full production of our Ohio expansion and continued improvements to our overall
production. In addition, we increased the average number of sellable watts per solar module by 13%
in the third quarter of 2007 compared with the third quarter of 2006. Our average selling price in
the third quarter of 2007 increased to $2.48 from $2.40 in the third quarter of 2006. Our average
selling price was positively impacted by $0.18 due to a favorable foreign exchange rate between the
U.S. dollar and the euro and partially offset by a price decline of $0.10. Approximately 88% of our
net sales in the third quarter of 2007 resulted from sales of solar modules to customers
headquartered in Germany. In the third quarter of 2006, almost all our net sales resulted from
sales of solar modules to customers headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Cost of sales |
|
$ |
24,537 |
|
|
$ |
76,967 |
|
|
$ |
52,430 |
|
|
|
214 |
% |
% of net sales |
|
|
60.1 |
% |
|
|
48.4 |
% |
|
|
|
|
|
|
|
|
18
Direct material expense increased by $27.7 million, warranty and end of life costs relating to
the reclamation and recycling of our solar modules increased by $3.2 million, sales freight and
other costs increased by $0.5 million, in each case, primarily as a result of higher production and
sales volumes in the third quarter of 2007 compared to the third quarter of 2006. In addition,
manufacturing overhead costs increased by $21.0 million, which was primarily composed of an
increase in salaries and personnel related expenses of $11.3 million, including a $1.7 million
increase in share-based compensation expense, resulting from the infrastructure associated with our
German plant build-out, facility and related expenses of $6.6 million and depreciation expense of
$3.1 million, primarily as a result of additional equipment becoming operational at our German
plant.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Gross profit |
|
$ |
16,257 |
|
|
$ |
82,040 |
|
|
$ |
65,783 |
|
|
|
405 |
% |
Gross margin % |
|
|
39.9 |
% |
|
|
51.6 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $65.8 million from $16.2 million in the third quarter of 2006 to
$82.0 million in the third quarter of 2007, reflecting an increase in net sales. As a percentage of
sales, gross margin increased 11.7 percentage points from 39.9% in the third quarter of 2006 to
51.6% in the third quarter of 2007, representing increased leverage of our fixed cost
infrastructure and scalability associated with our plant expansions, which drove a 280% increase in
the number of MW sold over the same time period.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Research and development |
|
$ |
1,657 |
|
|
$ |
3,854 |
|
|
$ |
2,197 |
|
|
|
133 |
% |
% of net sales |
|
|
4.1 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
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 $0.9
million in the third quarter of 2007 compared with $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) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Selling, general and administrative |
|
$ |
8,393 |
|
|
$ |
27,082 |
|
|
$ |
18,689 |
|
|
|
223 |
% |
% of net sales |
|
|
20.6 |
% |
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased primarily as a result of higher salaries
and personnel related expenses of $16.0 million due to increased headcount and an increase in
share-based compensation expense from $1.0 million in the third quarter of 2006, compared to $12.5
million in the third quarter of 2007. Share-based compensation expense in the third quarter of
2007 included a one time charge of $8.7 million relating to equity grants issued during the
quarter, which vested immediately upon grant. In addition, legal and professional service fees
increased by $2.2 million and other expenses increased by $0.5 million from the third quarter of
2006 to the third quarter of 2007, primarily resulting from expenses incurred in connection with
being a public company.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Production start-up |
|
$ |
1,109 |
|
|
$ |
2,805 |
|
|
$ |
1,696 |
|
|
|
153 |
% |
% of net sales |
|
|
2.7 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
19
In the third quarter of 2007, we incurred $2.8 million of production start-up expenses related
to our Malaysia expansions, including related legal and regulatory costs, compared with $1.1
million of production start-up expenses for our German plant expansion during the third 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 prior to production, related facility expenses,
management of our replication process and third party expenses.
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Foreign currency gain (loss) |
|
$ |
(298 |
) |
|
$ |
965 |
|
|
$ |
1,263 |
|
|
|
N.M. |
|
Foreign currency gain increased by $1.3 million during the third quarter of 2007 compared with
the third quarter of 2006, primarily due to an increase in the value of the euro relative to the
U.S. dollar, partially offset by lower euro denominated asset balances.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Interest income |
|
$ |
312 |
|
|
$ |
5,298 |
|
|
$ |
4,986 |
|
|
|
N.M. |
|
The increase in interest income of $5.0 million in the third quarter of 2007 compared with the
third quarter of 2006 was primarily due to higher cash, cash equivalent and marketable
securities balances throughout the third quarter of 2007. We completed an equity follow-on public
offering in August of 2007, which resulted in net proceeds of
approximately $366.0 million.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Interest expense |
|
$ |
(158 |
) |
|
$ |
(647 |
) |
|
$ |
(489 |
) |
|
|
N.M. |
|
Interest expense, net of amounts capitalized, increased by $0.5 million during the third
quarter of 2007 compared with the third quarter of 2006, primarily as a result of additional draws
on our credit facility with IKB.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Other expense, net |
|
$ |
(481 |
) |
|
$ |
(266 |
) |
|
$ |
215 |
|
|
|
N.M. |
|
The decrease in other expense of $0.2 million in the third quarter of 2007 compared with the
third quarter of 2006 was primarily due to lower financing fees.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Three Month Period Change |
Income tax expense |
|
$ |
(181 |
) |
|
$ |
(7,615 |
) |
|
$ |
(7,434 |
) |
|
|
N.M. |
|
20
Income tax expense of $7.6 million during the third quarter of 2007 is mainly due to the
reversal of valuation allowances of $7.5 million against previously established deferred tax
assets which primarily relate to foreign jurisdictions, offset by $15.1 million in current income tax expense. The reversal was based upon our
updated assessment of the future realization of our deferred income tax assets. The available
positive evidence at September 29, 2007 included cumulative taxable income for the previous 12
quarters and a projection of future taxable income.
Nine Months Ended September 30, 2006 and September 29, 2007
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Net sales |
|
$ |
82,279 |
|
|
$ |
303,179 |
|
|
$ |
220,900 |
|
|
|
268 |
% |
The increase in our net sales was due primarily to a 260% increase in the MW volume of solar
modules sold in the first nine months of 2007 compared with the first nine months of 2006. We were
able to increase the MW volume of solar modules sold primarily as a result of the production ramp
at our German plant, the full production of our Ohio expansion and continued improvements to our
overall production throughput. In addition, we increased the average number of sellable watts per
solar module by 10% in the first nine months of 2007 compared with the first nine months of 2006.
Our average selling price in the first nine months of 2007 increased to $2.41, up from $2.35 in the
first nine months of 2006. Our average selling price was positively impacted by $0.18 due to
favorable foreign exchange rate changes between the U.S. dollar and the euro and was partially
offset by a price decline of $0.12. Approximately 94% of our net sales in the first nine months of
2007 resulted from sales of solar modules to customers headquartered in Germany. In the first nine
months of 2006, almost all our net sales resulted from sales of solar modules to customers
headquartered in Germany.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Cost of sales |
|
$ |
53,650 |
|
|
$ |
162,726 |
|
|
$ |
109,076 |
|
|
|
203 |
% |
% of net sales |
|
|
65.2 |
% |
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
Direct material expense increased by $53.0 million, warranty and end of life costs relating to
the reclamation and recycling of our solar modules increased by $5.6 million, sales freight and
other costs increased by $1.7 million, in each case, primarily as a result of higher production
volumes in the first nine months of 2007, compared with the first nine months of 2006. In addition,
manufacturing overhead costs increased by $48.8 million, which was primarily composed of an
increase in salaries and personnel related expenses of $26.9 million, including a $3.3 million
increase in share-based compensation expense, resulting from the infrastructure associated with our
Ohio expansion and German plant build-out, facility and related expenses of $12.3 million and
depreciation expense of $9.6 million, primarily as a result of additional equipment becoming
operational at our Ohio and German plants.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Gross profit |
|
$ |
28,629 |
|
|
$ |
140,453 |
|
|
$ |
111,824 |
|
|
|
391 |
% |
Gross margin % |
|
|
34.8 |
% |
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $111.8 million from $28.6 million in the first nine months of 2006
to $140.4 million in the first nine months of 2007, reflecting an increase in net sales. As a
percentage of sales, gross margin increased 11.5 percentage points from 34.8% in the first nine
months of 2006 to 46.3% in the first nine months of 2007, representing increased leverage of our
fixed cost infrastructure and scalability associated with our plant expansions, which drove a 260%
increase in the number of MW sold. Additionally, we incurred
$7.6 million of costs, or 2.5% of revenues, associated with the ramp of our German plant in the first nine
21
months of
2007, compared with $1.1 million of costs, or 1.3% of revenues, incurred in the first
nine months of 2006 related to the ramp of our Ohio expansion.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Research and development |
|
$ |
4,712 |
|
|
$ |
10,675 |
|
|
$ |
5,963 |
|
|
|
127 |
% |
% of net sales |
|
|
5.7 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
The increase in research and development expense was primarily the result of a $5.7 million
increase in personnel related expense, which included share-based compensation expense of $3.6
million in the first nine months of 2007 compared with $1.8 million for the same period in 2006,
due to increased headcount and additional option awards. Consulting and other expenses also
increased by $1.1 million and were partially offset by a $0.8 million increase in grant revenue
received over the same time period.
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Selling, general and administrative |
|
$ |
22,398 |
|
|
$ |
58,057 |
|
|
$ |
35,659 |
|
|
|
159 |
% |
% of net sales |
|
|
27.2 |
% |
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased primarily as a result of an increase in
salaries and personnel related expenses of $27.2 million due to increased headcount and an increase
in share-based compensation expense from $3.0 million in the first nine months of 2006 compared
with $18.2 million in the first nine months of 2007. Share-based compensation expense in the first
nine months of 2007 included a one time charge of $8.7 million relating to equity grants issued
during the third quarter, which vested immediately upon grant. In addition, legal and professional
service fees increased by $7.5 million and other expenses increased by $1.0 million from the first
nine months of 2006 to the first nine months of 2007, primarily resulting from expenses incurred in
connection with being a public company.
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Production start-up |
|
$ |
7,750 |
|
|
$ |
12,802 |
|
|
$ |
5,052 |
|
|
|
65 |
% |
% of net sales |
|
|
9.5 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
In the first nine months of 2007, we incurred $12.8 million of production start-up expenses
related to our German and Malaysia expansions, including legal and regulatory costs and increased
headcount, compared with $7.8 million of production start-up expenses for our Ohio and German plant
expansions during the first nine 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, management of our replication process and legal and regulatory
costs.
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Foreign currency gain |
|
$ |
2,792 |
|
|
$ |
716 |
|
|
$ |
(2,076 |
) |
|
|
N.M. |
|
Foreign currency gain decreased by $2.1 million from the first nine months of 2006 to the
first nine months of 2007, primarily as a result of lower euro denominated asset balances and the
implementation of a hedging program for certain inter-company loans, partially offset by an
increase in the euro.
Interest income
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Interest income |
|
$ |
893 |
|
|
$ |
13,199 |
|
|
$ |
12,306 |
|
|
|
N.M. |
|
The increase in interest income of $12.3 million for the first nine months of 2007 compared
with the first nine months of 2006 was primarily due to higher cash, cash equivalent and
marketable securities balances. We completed an initial public offering in the fourth quarter of
2006 which resulted in net proceeds of approximately $302.7 million and an equity follow-on public
offering in the third quarter of 2007, which resulted in net proceeds
of approximately $366.0
million.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Interest expense |
|
$ |
(866 |
) |
|
$ |
(2,131 |
) |
|
$ |
(1,265 |
) |
|
|
N.M. |
|
Interest
expense, net of amounts capitalized, increased by $1.3 million
during the first nine
months of 2007 compared with the first nine months of 2006 primarily as a result of additional draws on our
credit facility with IKB.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Other expense, net |
|
$ |
(471 |
) |
|
$ |
(881 |
) |
|
$ |
(410 |
) |
|
|
N.M. |
|
The increase in other expense of $0.4 million for the first nine months of 2007 compared with
the first nine months of 2006 was primarily due to increased financing fees.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
(Dollars in thousands) |
|
September 30, 2006 |
|
September 29, 2007 |
|
Nine Month Period Change |
Income tax benefit
(expense) |
|
$ |
(181 |
) |
|
$ |
25,658 |
|
|
$ |
25,839 |
|
|
|
N.M. |
|
The income tax benefit of $25.7 million during the first nine months of 2007 is mainly due to the
reversal of valuation allowances of $46.7 million against previously established foreign and
domestic deferred tax
assets, offset by $21.0 million in current income tax expense. The reversal was based upon our
updated assessment of the future realization of our deferred income tax asset. The available
positive evidence at September 29, 2007 included cumulative 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 for the year ended December 30, 2006 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.
In addition, we implemented a cash management system in the third quarter of fiscal 2007.
Under this system, checks issued but not presented to banks frequently result in book overdraft
balances for accounting purposes, which we classify within accounts payable on our balance sheet.
Changes in book overdrafts are reported on our condensed consolidated statement of cash flows as a
component of operating cash flows associated with accounts payable, as they do not represent actual
bank overdrafts. The amount of these checks included in accounts payable as of September 29, 2007
was $3.5 million.
Liquidity and Capital Resources
23
As of September 29, 2007, we had $681.8 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 $106.2 million during the first nine months of 2007
compared with cash used in operating activities of $13.9 million during the same period in 2006.
Cash received from customers increased to $309.8 million during the first nine months of 2007 from
$58.5 million during the first nine months of 2006 primarily due to an increase in net sales. This
increase was partially offset by an increase in income taxes paid of $18.2 million in the first
nine months of 2007 and an increase in cash paid to suppliers and employees of $172.2 million
during the first nine months of 2007 compared with cash paid to suppliers and employees of $72.6
million during the same period in 2006, mainly due to an increase in raw materials purchases, an
increase in personnel related costs due to higher headcount and other costs supporting our global
expansion.
Investing Activities
Cash used in investing activities was $715.7 million during the first nine months of 2007
compared with $103.6 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 $564.2 million during the first nine months of 2007. Capital expenditures were $145.6
million during the first nine months of 2007 and $98.0 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 $416.1 million during the first nine months of 2007
compared with $132.2 million during the same period in 2006. During the first nine months of 2007
we received $366.0 million in net proceeds primarily from the issuance of our common stock as a
result of our follow-on offering and $48.2 million from additional draws under our IKB credit
facilities. Net proceeds from the exercise of stock options were $6.7 million. Tax benefits related
to the exercise of stock options during the first nine months of 2007 were $18.6 million. In
addition, we received $6.6 million in taxable investment incentives (Investitionszuschuesse) from
the State of Brandenburg related to the construction of our plant in Frankfurt/Oder, Germany.
These receipts were partially offset by $30.0 million in net repayments of long-term debt. Cash
provided by financing activities for the first nine months of 2006 was primarily cash receipts of
$98.3 million in net proceeds from debt issued to third parties, $36.0 million in loans from
related parties, equity contributions of $30.0 million from our majority stockholder and $8.1
million in taxable investment incentives (Investitionszuschuesse) from the State of Brandenburg
related to the construction of our plant in Frankfurt/Oder, Germany. These receipts were partially
offset by $38.7 million in net repayments of related party debt. Also, during the first nine
months of 2006, we issued 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.
We
believe that our current cash and cash equivalents, cash flows from operating activities,
government grants and low interest debt financings for our German plant will be sufficient to
meet our working capital and capital expenditure needs for at least the next 12 months. However, if
our financial results or operating plans change from our current assumptions, we may not have
sufficient resources to support our business plan. As a result, we may engage in one or more debt
or equity financings in the future that 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.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 29, 2007.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. The
24
statement is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on
our consolidated financial position and results of operations.
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.
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 nine months of
2007 and 97.9% of our net sales in the first nine months of 2006. In the first nine months of 2007
and the first nine 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 nine months of 2007, a 10%
change in currency exchange rates would have impacted our net sales by $30.3 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 $2.4 million in the first nine months of 2007 and negatively impacted our cash flows
by $0.1 million in the first nine 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
September 29, 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
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 customers and 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 September 29, 2007, we held six pay fixed, receive Euribor
interest rate swaps with a combined notional value of 46.0 million ($64.4 million at an assumed
exchange rate of $1.40/1.00), 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
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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 September 29, 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 September 29, 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 September 29, 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 third quarter of 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 nine
months of 2007.
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 those certifications for a
more complete understanding of the subject matter presented.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives are being met. Further, the design of any
control systems must reflect the fact that there are resource constraints, and the benefits of all
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Control systems can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies or procedures.
26
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.
FINRA Inquiry
On August 1, 2007, we received a letter from the Market Regulation Department of the Financial
Industry Regulatory Authority (the FINRA) requesting certain information in connection with the
FINRAs 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 FINRA 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 FINRA has determined that any violations
of the NASD Conduct Rules or the federal securities laws have occurred.
On August 24, 2007 we received a second letter from the FINRA requesting copies of the
customer contracts that were the subject of the July 9, 2007 announcement. On October 11, 2007, we
received a third letter from the FINRA stating that, as part of its continuing review, the staff of
the Market Regulation Department had identified certain individuals and entities in respect of
which the FINRA was seeking certain information, including the nature and history of any
relationship between such identified individuals and entities and those persons who possessed
information about the new long-term supply contracts prior to our public disclosure, and a
statement as to the circumstances under which any knowledge of our business activities may have
been gained by such identified individuals and entities. Again, the letter stated that the inquiry
should not be construed as an indication that the FINRA has determined that any violations of the
NASD Conduct Rules or the federal securities laws have occurred.
We continue to cooperate with the FINRA 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/A filed on August 3, 2007,
which could materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K 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/A filed on August 3, 2007, have not materially changed.
27
Item 6. Exhibits
The following exhibits are filed with this Quarterly Report on Form 10-Q:
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Exhibit |
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Incorporated by Reference |
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Filed |
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Exhibit Description |
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Date of First Filing |
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Herewith |
3.1 |
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Amended and Restated |
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Certificate of Incorporation of |
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First Solar, Inc. |
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S-1/A |
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10/25/06 |
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333-135574 |
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3.1 |
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3.2 |
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By-Laws of First Solar, Inc. |
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S-1/A |
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11/2/06 |
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333-135574 |
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3.2 |
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10.1 |
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Employment Agreement dated August
27, 2007 between First Solar, Inc. and Kenneth Schultz (and related
agreements) |
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X |
31.01 |
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Certification of Chief |
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Executive Officer pursuant to |
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15 U.S.C. Section 7241, as |
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adopted pursuant to Section 302 |
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of the Sarbanes-Oxley Act of |
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31.02 |
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Certification of Chief |
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Financial Officer pursuant to |
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15 U.S.C. Section 7241, as |
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adopted pursuant to Section 302 |
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of the Sarbanes-Oxley Act of |
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2002 |
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32.01* |
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Certification of Chief |
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Executive Officer and Chief |
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Financial Officer pursuant to |
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18 U.S.C. Section 1350, as |
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adopted pursuant to Section 906 |
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of the Sarbanes-Oxley Act of |
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2002 |
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This exhibit shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective
of any general incorporation language in any filings. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FIRST SOLAR, INC.
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By: |
/s/ JENS MEYERHOFF
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Jens Meyerhoff |
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Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer) |
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November 7, 2007
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EXHIBIT INDEX
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Exhibit |
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Incorporated by Reference |
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Filed |
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Exhibit Description |
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Date of First Filing |
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Herewith |
3.1
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Amended and Restated
Certificate of
Incorporation of First
Solar, Inc.
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S-1/A
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10/25/06
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333-135574
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3.1 |
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3.2
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By-Laws of First Solar, Inc.
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S-1/A
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11/2/06
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333-135574
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3.2 |
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10.1
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Employment Agreement dated August
27, 2007 between First Solar, Inc. and Kenneth Schultz (and related
agreements) |
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31.01
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Certification of Chief
Executive Officer pursuant
to 15 U.S.C. Section 7241,
as adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
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31.02
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Certification of Chief
Financial Officer pursuant
to 15 U.S.C. Section 7241,
as adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
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32.01*
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Certification of Chief
Executive Officer and Chief
Financial Officer pursuant
to 18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
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X |
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* |
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This exhibit shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective
of any general incorporation language in any filings. |
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