10-Q 1 fslrjune1310qdraft.htm 10-Q FSLR June13 10q Draft


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2013
or
[ ]
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)
Delaware
20-4623678
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ]   No [x]

As of August 2, 2013, 97,647,373 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.
 




FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS
 
 
Page
Part I.
Financial Information (Unaudited)
 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and June 30, 2012
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and June 30, 2012
 
Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and June 30, 2012
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signature
 





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)

 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
Net sales
 
$
519,760

 
$
957,332

 
$
1,274,965

 
$
1,454,387

Cost of sales
 
379,662

 
713,591

 
965,541

 
1,133,901

Gross profit
 
140,098

 
243,741

 
309,424

 
320,486

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
30,964

 
32,365

 
60,895

 
68,449

Selling, general and administrative
 
66,265

 
52,184

 
140,730

 
144,004

Production start-up
 
1,392

 
533

 
2,768

 
4,591

Restructuring
 
2,381

 
19,000

 
4,728

 
420,065

Total operating expenses
 
101,002

 
104,082

 
209,121

 
637,109

Operating income (loss)
 
39,096

 
139,659

 
100,303

 
(316,623
)
Foreign currency (loss) gain
 
(1,068
)
 
1,015

 
550

 
31

Interest income
 
3,405

 
3,379

 
8,352

 
6,290

Interest expense, net
 
(875
)
 
(7,372
)
 
(1,625
)
 
(8,292
)
Other income (expense), net
 
504

 
(1,334
)
 
(329
)
 
(2,545
)
Income (loss) before income taxes
 
41,062

 
135,347

 
107,251

 
(321,139
)
Income tax expense
 
7,464

 
24,364

 
14,511

 
17,294

Net income (loss)
 
$
33,598

 
$
110,983

 
$
92,740

 
$
(338,433
)
Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.38

 
$
1.28

 
$
1.05

 
$
(3.90
)
Diluted
 
$
0.37

 
$
1.27

 
$
1.03

 
$
(3.90
)
Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
89,201

 
86,855

 
88,209

 
86,681

Diluted
 
91,142

 
87,653

 
90,265

 
86,681


See accompanying notes to these condensed consolidated financial statements.

3



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
Net income (loss)
 
$
33,598

 
$
110,983

 
$
92,740

 
$
(338,433
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
1,500

 
(9,795
)
 
(1,577
)
 
3,714

Unrealized (loss) gain on marketable securities and restricted investments
 
(17,029
)
 
12,626

 
(27,370
)
 
8,562

Unrealized gain (loss) on derivative instruments
 
2,909

 
2,585

 
(2,937
)
 
(12,715
)
Total other comprehensive income (loss), net of tax
 
(12,620
)
 
5,416

 
(31,884
)
 
(439
)
Comprehensive income (loss)
 
$
20,978

 
$
116,399

 
$
60,856

 
$
(338,872
)

See accompanying notes to these condensed consolidated financial statements.

4



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
 
June 30,
2013
 
December 31,
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
928,657

 
$
901,294

Marketable securities
 
356,615

 
102,578

Accounts receivable trade, net
 
192,580

 
553,567

Accounts receivable, unbilled and retainage
 
460,438

 
400,987

Inventories
 
334,261

 
434,921

Balance of systems parts
 
128,384

 
98,903

Deferred project costs
 
1,004,778

 
21,390

Deferred tax assets, net
 
28,878

 
44,070

Assets held for sale
 
49,521

 
49,521

Note receivable affiliate
 

 
17,725

Prepaid expenses and other current assets
 
117,167

 
207,368

Total current assets
 
3,601,279

 
2,832,324

Property, plant and equipment, net
 
1,560,908

 
1,525,382

Project assets and deferred project costs
 
559,151

 
845,478

Deferred tax assets, net
 
332,688

 
317,473

Restricted cash and investments
 
275,183

 
301,400

Goodwill
 
74,930

 
65,444

Inventories
 
132,668

 
134,375

Retainage
 
237,594

 
270,364

Other assets
 
93,725

 
56,452

Total assets
 
$
6,868,126

 
$
6,348,692

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
217,587

 
$
350,230

Income taxes payable
 
4,749

 
5,474

Accrued expenses
 
391,764

 
554,433

Current portion of long-term debt
 
61,194

 
62,349

Deferred revenue
 
1,682

 
2,056

Payments and billings for deferred project costs
 
1,116,670

 
94,535

Other current liabilities
 
61,149

 
32,297

Total current liabilities
 
1,854,795

 
1,101,374

Accrued solar module collection and recycling liability
 
248,178

 
212,835

Long-term debt
 
194,570

 
500,223

Payments and billings for deferred project costs
 
38,974

 
636,518

Other liabilities
 
374,871

 
292,216

Total liabilities
 
2,711,388

 
2,743,166

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 97,629,891 and 87,145,323 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
 
98

 
87

Additional paid-in capital
 
2,555,872

 
2,065,527

Accumulated earnings
 
1,622,473

 
1,529,733

Accumulated other comprehensive (loss) income
 
(21,705
)
 
10,179

Total stockholders’ equity
 
4,156,738

 
3,605,526

Total liabilities and stockholders’ equity
 
$
6,868,126

 
$
6,348,692

See accompanying notes to these condensed consolidated financial statements.

5



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
 
Six Months Ended
 
 
 
June 30,
2013
 
June 30,
2012
Cash flows from operating activities:
 
 
 
 
Cash received from customers
 
$
2,050,622

 
$
1,639,136

Cash paid to suppliers and associates
 
(1,709,914
)
 
(1,169,399
)
Interest received
 
3,724

 
2,970

Interest paid
 
(5,974
)
 
(18,030
)
Income tax refunds (payments), net
 
5,976

 
25,561

Excess tax benefit from share-based compensation arrangements
 
(55,695
)
 
(66,853
)
Other operating activities
 
89

 
(1,050
)
Net cash provided by operating activities
 
288,828

 
412,335

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(156,856
)
 
(281,972
)
Purchases of marketable securities
 
(316,285
)
 
(14,446
)
Proceeds from maturities and sales of marketable securities
 
60,766

 
83,367

Investment in note receivable, affiliate
 

 
(21,883
)
Payments received on note receivable, affiliate
 
17,108

 

Purchase of restricted investments
 

 
(80,667
)
Change in restricted cash
 
5,136

 
21,547

Acquisitions, net of cash acquired
 
(30,745
)
 
(2,437
)
Purchase of equity and cost method investments
 
(14,894
)
 

Other investing activities
 
(1,850
)
 
(4,812
)
Net cash used in investing activities
 
(437,620
)
 
(301,303
)
Cash flows from financing activities:
 
 
 
 
Repayments of long-term debt
 
(635,876
)
 
(735,296
)
Proceeds from borrowings under long-term debt, net of discount and issuance costs
 
335,000

 
590,000

Excess tax benefit from share-based compensation arrangements
 
55,695

 
66,853

Repayment of economic development funding
 
(8,315
)
 
(6,820
)
Proceeds from equity offering, net of issuance costs
 
430,368

 

Other financing activities
 
349

 
(643
)
Net cash provided by (used in) financing activities
 
177,221

 
(85,906
)
Effect of exchange rate changes on cash and cash equivalents
 
(1,066
)
 
(505
)
Net increase in cash and cash equivalents
 
27,363

 
24,621

Cash and cash equivalents, beginning of the period
 
901,294

 
605,619

Cash and cash equivalents, end of the period
 
$
928,657

 
$
630,240

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
57,681

 
$
61,615

Acquisitions funded by liabilities and contingent consideration
 
$
22,780

 
$


 See accompanying notes to these condensed consolidated financial statements.

6



FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. 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 (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for any other period. The condensed consolidated balance sheet at December 31, 2012 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 31, 2012 included in our Annual Report on Form 10-K filed with the SEC.

Certain prior year balances have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total cash flows, total net sales, operating income, net income, total assets, total liabilities or stockholders’ equity.

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

Note 2. Summary of Significant Accounting Policies
  
Use of Estimates. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Significant estimates in these condensed consolidated financial statements include percentage-of-completion revenue recognition, estimates of future cash flows from and the economic useful lives of long-lived assets, certain accrued liabilities, income taxes and tax valuation allowances, reportable segment allocations, product warranties and manufacturing excursions, accrued collection and recycling expense, applying the acquisition method of accounting for business combinations and goodwill. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from these estimates and assumptions.

Revenue Recognition — Systems Business. We recognize revenue for arrangements entered into by our systems business generally using two revenue recognition models, following the guidance in ASC 605, Accounting for Long-term Construction Contracts or, for arrangements which include land or land rights, ASC 360, Accounting for Sales of Real Estate.

For systems business sales arrangements that do not include land or land rights and thus are accounted for under ASC 605, we use the percentage-of-completion method, as described further below, using actual costs incurred over total estimated costs to develop and construct a project (including module costs) as our standard accounting policy, unless we cannot make reasonably dependable estimates of the costs to complete the contract, in which case we would use the completed contract method.

For systems business sales arrangements that are accounted for under ASC 360, where we convey control of land or land rights, we record the sale as revenue using one of the following revenue recognition methods, based upon evaluation of the substance and form of the terms and conditions of such real estate sales arrangements:

(i) We apply the percentage-of-completion method, as further described below, to certain real estate sales arrangements covered under ASC 360, when a sale has been consummated, we have transferred the usual risks and rewards of ownership to the buyer, the initial and continuing investment criteria have been met, we have the ability to estimate our costs and progress toward completion, and all other revenue recognition criteria have been met. The initial and continuing investment requirements, which demonstrate a buyer’s commitment to honor their obligations for the sales arrangement, can typically be met through the receipt of cash or an irrevocable letter of credit from a highly credit worthy lending institution. When evaluating whether the usual risks and rewards of ownership have transferred to the buyer, we consider whether we have or may be contingently required to have any prohibited forms of continuing involvement with the project. Prohibited forms of continuing involvement in a real estate sales arrangement may include us retaining risks or rewards associated with the project that are not customary with the range of risks or rewards that an engineering, procurement and construction (“EPC”) contractor may assume.

7




(ii) Depending on whether the initial and continuing investment requirements have been met, and whether collectability from the buyer is reasonably assured, we may align our revenue recognition and release of project assets or deferred project costs to cost of sales with the receipt of payment from the buyer if the sale has been consummated and we have transferred the usual risks and rewards of ownership to the buyer.

(iii) We may also record revenue for certain sales arrangements after construction of discrete portions of a project or after the entire project is substantially complete, we have transferred the usual risks and rewards of ownership to the buyer, and we have received substantially all payments due from the buyer or the initial and continuing investment criteria have been met.

For any systems business sales arrangements containing multiple deliverables (including our solar modules) not required to be accounted for under ASC 360 (real estate) or ASC 605 (long-term construction contracts), we analyze each activity within the sales arrangement to ensure that we adhere to the separation guidelines of ASC 605 for multiple-element arrangements. We allocate revenue for any transactions involving multiple elements to each unit of accounting based on its relative selling price, and recognize revenue for each unit of accounting when all revenue recognition criteria for a unit of accounting have been met.

Revenue Recognition - Percentage-of-Completion. In applying the percentage-of-completion method, we use the actual costs incurred relative to estimated costs to complete (including module costs) in order to estimate the progress towards completion to determine the amount of revenue and profit to recognize. Incurred costs include all installed direct materials, installed solar modules, labor, subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, and tools. We recognize direct material and solar module costs as incurred costs when the direct materials and solar modules have been installed in the project. When contracts specify that title to direct materials and solar modules transfers to the customer before installation has been performed, we will not recognize revenue or associated costs until those materials are installed and have met all other revenue recognition requirements. We consider direct materials and solar modules to be installed when they are permanently placed or fitted to a solar power system as required by engineering designs. Solar modules manufactured by us that will be used in our solar power systems, which we still hold title to, remain within inventory until such modules are installed in a solar power system.

The percentage-of-completion method of revenue recognition requires us to make estimates of contract revenues and costs to complete our projects. In making such estimates, management judgments are required to evaluate significant assumptions including the cost of materials and labor, expected labor productivity, the impact of potential variances in schedule completion, the amount of net contract revenues and the impact of any penalties, claims, change orders, or performance incentives.

If estimated total costs on any contract are greater than the contract revenues, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of the revisions to estimates related to contract revenues and costs to complete contracts, including penalties, incentive awards, claims, change orders, anticipated losses and others are recorded in the period in which the revisions to estimates are identified and can be reasonably estimated. The effect of the changes on future periods are recognized as if the revised estimates had been used since revenue was initially recognized under the contract. Such revisions could occur in any reporting period and the effects may be material depending on the size of the contracts or changes in estimate.

Revenue Recognition - Components Business. Our components business sells solar modules directly to third party solar power system integrators and operators. We recognize revenue for module sales when persuasive evidence of an arrangement exists, delivery of the module has occurred and title and risk of loss have passed to the customer, the sales price is fixed or determinable, and the collectability of the resulting receivable is reasonably assured. Under this policy, we record a trade receivable for the selling price of our module and reduce inventory for the cost of goods sold when delivery occurs in accordance with the terms of the sales contracts. Our customers typically do not have extended payment terms or rights of return for our products. We account for rebates or other customer incentives as a reduction to the selling price of our solar modules at the time of sale; and therefore, as a reduction to revenue.

Ventures and Variable Interest Entities. In the normal course of business we establish wholly owned project companies which may be considered variable interest entities.  We consolidate wholly owned variable interest entities, even if there are other variable interests in such entities, as we are considered the primary beneficiary of such entities.  Additionally, we have and may in the future form joint venture type arrangements (“ventures”), including partnerships and partially owned limited liability companies or similar legal structures, with one or more third parties primarily to develop and build specific or a pipeline of solar power projects. These types of ventures are core to our business and long-term strategy related to providing solar photovoltaic (“PV”) generation solutions using our modules to sustainable geographic markets. In accordance with ASC 810, Consolidations, we analyze all of our ventures and classify them into two groups: (i) ventures that must be consolidated because they are either not variable interest entities (“VIEs”) and we hold the majority voting interest, or because they are VIEs and we are the primary

8



beneficiary; and (ii) ventures that do not need to be consolidated and are accounted for under either the equity or cost methods of accounting because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.
Ventures are considered VIEs if (i) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (ii) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns; or (iii) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are on behalf of the investor. Our venture agreements typically require some form of project development capital or project equity ranging from amounts necessary to obtain a power purchase agreements (“PPA”) (or similar power off-take agreement) to a pro-rata portion of the total equity required to develop and complete construction of a project, depending upon the opportunity and the market our ventures are in. Our limited number of ventures as of June 30, 2013 and future ventures of a similar nature are typically VIEs because the total equity investment at risk is not sufficient to permit the ventures to finance their activities without additional financial support.
We are considered the primary beneficiary of and are required to consolidate a VIE if we have the power to direct the activities that most significantly impact that VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of that VIE that could potentially be significant to the VIE. If we determine that we do not have the power to direct the activities that most significantly impact the venture, then we are not primary beneficiary of the VIE.
We account for our unconsolidated ventures using either the equity or cost methods of accounting depending upon whether we have the ability to exercise significant influence over a venture. We consider the participating and protective rights we have as well as the legal form of the venture when evaluating whether we have the ability to exercise significant influence, which requires us to apply the equity method of accounting. Income from ventures for the three and six months ended June 30, 2013 was immaterial to the condensed consolidated statements of operations.
Refer to Note 2. “Summary of Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 for a more complete summary of our significant accounting policies.

Note 3. Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities, updated by ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of their financial statements to understand the effect of those arrangements on their financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. ASU 2011-11, as amended by ASU 2013-01, is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of ASU 2011-11, as amended by ASU 2013-01, in the first quarter of 2013, did not have an impact on our financial position, results of operations, or cash flows.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 gives companies an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate it is more-likely-than-not that an indefinite-lived intangible asset (excluding goodwill) is impaired. If based on its qualitative assessment, a company concludes that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of ASU 2012-02, in the first quarter of 2013, did not have an impact on our financial position, results of operations, or cash flows.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12 for all public and private organizations. The amendment requires that an entity must report the effect of significant reclassifications out of accumulated other comprehensive income by the respective line items in net income if the amount being reclassified is required under U.S. GAAP. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning on or after

9



December 15, 2012. The adoption of ASU 2013-02, in the first quarter of 2013, did not have an impact on our financial position, results of operations or cash flows.

Note 4. Restructuring

The activity related to our restructuring charges for material restructuring initiatives that were not completed as of December 31, 2012 are as follows:
 
February 2012 Manufacturing Restructuring

In February 2012, executive management completed an evaluation of and approved a set of manufacturing capacity and other initiatives primarily intended to adjust our previously planned manufacturing capacity expansions and global manufacturing footprint. The primary goal of these initiatives was to better align production capacity and geographic location of such capacity with expected geographic market requirements and demand. The remaining $5.1 million of asset impairment related charges from the February 2012 manufacturing restructuring as of December 31, 2012 is included within other liabilities and such amount is not expected to be paid within the next year.

April 2012 European Restructuring

In April 2012, executive management approved a set of restructuring initiatives intended to align the organization with our Long Term Strategic Plan including expected sustainable market opportunities and to reduce costs. As part of these initiatives, we substantially reduced our European operations including the closure of our manufacturing operations in Frankfurt (Oder), Germany at the end of 2012. Due to the then current lack of policy support for utility-scale solar projects in Europe at that time, we did not believe there was a business case for continuing manufacturing operations in Germany or to proceed with the previously announced 2-line plant in France. Additionally, we substantially reduced the size of our operations in Mainz, Germany and elsewhere in Europe. After the closure of our Frankfurt (Oder) manufacturing operations, which was comprised of eight production lines, at the end of 2012, First Solar’s installed manufacturing capacity consists of 24 production lines in Kulim, Malaysia and four production lines in Perrysburg, Ohio.

In connection with these restructuring initiatives, we incurred total charges to operating expense during 2012 of $342.0 million and $4.7 million in the six months ended June 30, 2013. These total charges consisted of (i) $253.0 million in asset impairments and asset impairment related charges, primarily related to the closure of the Frankfurt (Oder) plants; (ii) $63.2 million in severance and termination related costs; and (iii) $30.5 million for the required repayment of German government grants related to the second Frankfurt (Oder) plant.

The following table summarizes the April 2012 European restructuring amounts remaining as of December 31, 2012, amounts recorded to restructuring expense during the three and six months ended June 30, 2013, and the remaining balance at June 30, 2013 (in thousands):
April 2012 European Restructuring
 
Asset Impairments and Related Costs
 
Severance and Termination Related Costs
 
Grant Repayments
 
Total
Ending Balance at December 31, 2012
 
$
16,625

 
$
25,717

 
$
8,400

 
$
50,742

Charges to Income
 

 
2,347

 

 
2,347

Change in Estimates
 

 

 

 

Cash Payments
 
(7,193
)
 
(6,720
)
 
(8,315
)
 
(22,228
)
Non-Cash Amounts Including Foreign Exchange Impact
 
(304
)
 
(718
)
 
(85
)
 
(1,107
)
Ending Balance at March 31, 2013
 
9,128

 
20,626

 

 
29,754

Charges to Income
 
2,170

 
1,185

 

 
3,355

Change in Estimates
 
(945
)
 
(29
)
 

 
(974
)
Cash Payments
 
(6,597
)
 
(13,563
)
 

 
(20,160
)
Non-Cash Amounts Including Foreign Exchange Impact
 
(771
)
 
316

 

 
(455
)
Ending Balance at June 30, 2013
 
$
2,985

 
$
8,535

 
$

 
$
11,520



10



Expenses recognized for restructuring activities are presented in “Restructuring” on the condensed consolidated statements of operations. Substantially all expenses related to the April 2012 European restructuring were related to our components segment. We expect to incur up to $1 million in additional restructuring expense through the end of 2013 primarily related to remaining asset impairment and related costs associated with such restructuring initiatives.

Note 5. Acquisitions

TetraSun

In April 2013, we acquired 100%, of the stock not previously owned by us, of TetraSun, Inc. (“TetraSun”), a development stage company that is in advanced stages of developing high efficiency crystalline silicon technology that is expected to provide improvements in performance relative to conventional crystalline silicon solar modules.

The all-cash acquisition was not material to our historical condensed consolidated balance sheets, results of operations or cash flows. We have included the financial results of TetraSun in our condensed consolidated financial statements from the date of acquisition.

In connection with applying the acquisition method of accounting, $39.1 million of the purchase price consideration was assigned to an in-process research and development (“IPR&D”) intangible asset that will be amortized over its useful life upon successful completion of the project or expensed earlier if impaired and $6.1 million was assigned to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets.

Solar Chile

In January 2013, we acquired 100% of the ownership interest of Solar Chile S.A. (“Solar Chile”), a Chilean-based solar project development company with substantially all of its assets being a portfolio of early to mid-stage utility-scale PV power projects in northern Chile, in an all-cash transaction which was not material to our historical condensed consolidated balance sheets, results of operations or cash flows. We have included the financial results of Solar Chile in our condensed consolidated financial statements from the date of acquisition.

Note 6. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
 
June 30,
2013
 
December 31,
2012
Cash:
 
 
 
 
Cash
 
$
882,091

 
$
889,065

Cash equivalents:
 
 
 
 
Commercial paper
 
3,199

 
1,500

Money market funds
 
43,367

 
10,729

Total cash and cash equivalents
 
928,657

 
901,294

Marketable securities:
 
  
 
 
Commercial paper
 
5,097

 
1,698

Corporate debt securities
 
137,704

 
23,384

Federal agency debt
 
25,813

 
29,936

Foreign agency debt
 
110,641

 
7,233

Foreign government obligations
 
26,191

 
4,142

Supranational debt
 
47,673

 
34,181

U.S. government obligations
 
3,496

 
2,004

Total marketable securities
 
356,615

 
102,578

Total cash, cash equivalents, and marketable securities
 
$
1,285,272

 
$
1,003,872


We have classified our marketable securities as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as a part of other comprehensive income (loss). We report realized gains and losses on the sale

11



or maturity of our marketable securities in other income (expense), net computed using the specific identification method. We may sell these securities prior to their stated maturities after consideration of our liquidity requirements. We view securities with maturities beyond 12 months as available to support current operations, and accordingly we classify all such securities as current assets under the caption marketable securities in the accompanying condensed consolidated balance sheets. During the three and six months ended June 30, 2013 and June 30, 2012, we realized an immaterial amount of gains and losses on the sale or maturities of our marketable securities. See Note 12. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the fair value of our marketable securities.
 
All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable security to be impaired when its fair value is less than its cost, in which case we would further review the marketable security to determine whether it is other-than-temporarily impaired. When we evaluate a marketable security for other-than-temporary impairment, we review factors such as the length of time and extent to which its fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more-likely-than-not that we will be required to sell the marketable security before we have recovered its cost basis. If a marketable security were other-than-temporarily impaired, we would write it down through other expense to its impaired value and establish that as a new cost basis. We did not identify any of our marketable securities as other-than-temporarily impaired at June 30, 2013 and December 31, 2012.

The following tables summarize the unrealized gains and losses related to our marketable securities, by major security type, as of June 30, 2013 and December 31, 2012 (in thousands):
 
 
As of June 30, 2013
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper
 
$
5,097

 
$

 
$

 
$
5,097

Corporate debt securities
 
137,818

 
20

 
134

 
137,704

Federal agency debt
 
25,817

 
11

 
15

 
25,813

Foreign agency debt
 
110,788

 
6

 
153

 
110,641

Foreign government obligations
 
26,190

 
1

 

 
26,191

Supranational debt
 
47,692

 
40

 
59

 
47,673

U.S. government obligations
 
3,497

 

 
1

 
3,496

Total
 
$
356,899

 
$
78

 
$
362

 
$
356,615


 
 
As of December 31, 2012
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper
 
$
1,697

 
$
1

 
$

 
$
1,698

Corporate debt securities
 
23,358

 
26

 

 
23,384

Federal agency debt
 
29,888

 
49

 
1

 
29,936

Foreign agency debt
 
7,266

 

 
33

 
7,233

Foreign government obligations
 
4,138

 
4

 

 
4,142

Supranational debt
 
34,110

 
71

 

 
34,181

U.S. government obligations
 
2,000

 
4

 

 
2,004

Total
 
$
102,457

 
$
155

 
$
34

 
$
102,578


Contractual maturities of our marketable securities as of June 30, 2013 and December 31, 2012 were as follows (in thousands):
 
 
As of June 30, 2013
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
71,006

 
$
55

 
$
11

 
$
71,050

One year to two years
 
259,274

 
20

 
337

 
258,957

Two years to three years
 
26,619

 
3

 
14

 
26,608

Total
 
$
356,899

 
$
78

 
$
362

 
$
356,615


12




 
 
As of December 31, 2012
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
71,225

 
$
67

 
$
32

 
$
71,260

One year to two years
 
30,707

 
88

 
1

 
30,794

Two years to three years
 
525

 

 
1

 
524

Total
 
$
102,457

 
$
155

 
$
34

 
$
102,578


The net unrealized loss of $0.3 million and net unrealized gain of $0.1 million as of June 30, 2013 and December 31, 2012, respectively, on our marketable securities were primarily the result of changes in interest rates. Our investment policy requires marketable securities to be highly rated and limits the security types, issuer concentration, and duration to maturity of our marketable securities portfolio.

The following table shows gross unrealized losses and estimated fair values for those marketable securities that were in an unrealized loss position as of June 30, 2013 and December 31, 2012, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):
 
 
As of June 30, 2013
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Corporate debt securities
 
$
48,170

 
$
134

 
$

 
$

 
$
48,170

 
$
134

Federal agency debt
 
10,016

 
15

 

 

 
10,016

 
15

Foreign agency debt
 
86,100

 
153

 

 

 
86,100

 
153

Foreign government obligations
 
1,053

 

 

 

 
1,053

 

Supranational debt
 
29,149

 
59

 

 

 
29,149

 
59

U.S. government obligations
 
3,502

 
1

 

 

 
3,502

 
1

Total
 
$
177,990

 
$
362

 
$

 
$

 
$
177,990

 
$
362


 
 
As of December 31, 2012
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Federal agency debt
 
$
524

 
$
1

 
$

 
$

 
$
524

 
$
1

Foreign agency debt
 

 

 
5,970

 
33

 
5,970

 
33

Total
 
$
524

 
$
1

 
$
5,970

 
$
33

 
$
6,494

 
$
34


Note 7. Restricted Cash and Investments

Restricted cash and investments consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
 
June 30,
2013
 
December 31,
2012
Restricted cash (1)
 
$
157

 
$
184

Restricted investments
 
275,026

 
301,216

Restricted cash and investments
 
$
275,183

 
$
301,400


(1)
There was $5.1 million of restricted cash included within prepaid expenses and other current assets at December 31, 2012 primarily related to required cash collateral for certain letters of credit provided for projects under development in foreign jurisdictions.


13



At June 30, 2013 and December 31, 2012, our restricted investments consisted of long-term marketable securities that we hold through a custodial account to fund the estimated future costs of collecting and recycling modules covered under our solar module collection and recycling program and related obligations. We have classified our restricted investments as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as a part of accumulated other comprehensive income (loss). We report realized gains and losses on the maturity or sale of our restricted investments in other income (expense), net computed using the specific identification method. Restricted investments are classified as noncurrent as the underlying accrued solar module collection and recycling liability is also noncurrent in nature.

We fund the estimated collection and recycling obligations incremental to amounts already pre-funded in prior years for the cumulative module sales covered by our solar module collection and recycling program within 90 days of the end of each year, assuming for this purpose a service life of 25 years for our solar modules. To ensure that our collection and recycling program for covered modules is available at all times and the pre-funded amounts are accessible regardless of our financial status in the future (even in the case of our own insolvency), we have established a trust structure (the “Trust”) under which estimated required funds are put into custodial accounts with an established and reputable bank as the investment advisor in the name of the Trust, for which First Solar, Inc. (“FSI”), First Solar Malaysia Sdn. Bhd. (“FS Malaysia”), and First Solar Manufacturing GmbH (“FSM GmbH”) are grantors. Only the trustee can distribute funds from the custodial accounts and these funds cannot be accessed for any purpose other than to cover qualified costs of module collection and recycling, either by us or a third party executing the required collection and recycling services. Investments in this custodial account must meet the criteria of the highest quality investments, such as highly rated government or agency bonds. We closely monitor our exposure to European markets and maintain holdings primarily consisting of German and French sovereign debt securities which are not currently at risk of default. Under the Trust agreements, each year we determine the annual pre-funding requirement (if any) based upon the difference between the current estimated future costs of collecting and recycling all solar modules covered under our program combined with the rate of return restricted investments will earn prior to being utilized to cover qualified collection and recycling costs and amounts already pre-funded in prior years. Based primarily upon reductions in the estimated future costs of collecting and recycling solar modules covered under our program combined with the cumulative amounts pre-funded since the inception of our program, we have determined that no incremental funding was required in the first quarter of 2013 for all historical covered module sales through December 31, 2012.

The following table summarizes unrealized gains and losses related to our restricted investments by major security type as of June 30, 2013 and December 31, 2012 (in thousands):
 
 
As of June 30, 2013
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
189,780

 
$
27,910

 
$

 
$
217,690

U.S. government obligations
 
54,626

 
3,559

 
849

 
57,336

Total
 
$
244,406

 
$
31,469

 
$
849

 
$
275,026


 
 
As of December 31, 2012
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
188,350

 
$
47,921

 
$

 
$
236,271

U.S. government obligations
 
53,368

 
11,577

 

 
64,945

Total
 
$
241,718

 
$
59,498

 
$

 
$
301,216


As of June 30, 2013 and December 31, 2012, the contractual maturities of these restricted investments were between 15 years and 24 years. As of June 30, 2013, the gross unrealized loss of $0.8 million had been in a continuous loss position for less than 12 months.

Note 8. Net 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 employee stock options, restricted and performance stock units, stock purchase plan shares, and contingently issuable shares, unless there is a net loss for the period.


14



The calculation of basic and diluted net income (loss) per share for the three and six months ended June 30, 2013 and June 30, 2012 was as follows (in thousands, except per share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Basic net income (loss) per share
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
33,598

 
$
110,983

 
$
92,740

 
$
(338,433
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
89,201

 
86,855

 
88,209

 
86,681

Diluted net income (loss) per share
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
89,201

 
86,855

 
88,209

 
86,681

Effect of stock options, restricted and performance stock units, and stock purchase plan shares
 
1,941

 
798

 
2,056

 

Weighted-average shares used in computing diluted net income (loss) per share
 
91,142

 
87,653

 
90,265

 
86,681


 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Per share information — basic:
 
 
 
 
 
 
 
 
Net income (loss) per share
 
$
0.38

 
$
1.28

 
$
1.05

 
$
(3.90
)
 
 
 
 
 
 
 
 
 
Per share information — diluted:
 
 
 
 
 
 
 
 
Net income (loss) per share
 
$
0.37

 
$
1.27

 
$
1.03

 
$
(3.90
)

The following number of outstanding employee stock options, restricted and performance stock units and stock purchase plan shares were excluded from the computation of diluted net income (loss) per share for the three and six months ended June 30, 2013 and June 30, 2012 as they would have had an anti-dilutive effect (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Anti-dilutive shares
 
91

 
3,681

 
107

 
2,324


Note 9. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):

 
 
June 30,
2013
 
December 31,
2012
Accounts receivable trade, gross
 
$
202,109

 
$
568,070

Allowance for doubtful accounts
 
(9,529
)
 
(14,503
)
Accounts receivable trade, net
 
$
192,580

 
$
553,567


At June 30, 2013 and December 31, 2012, $51.6 million and $104.5 million, respectively, of our Accounts receivable trade, net were secured by letters of credit, bank guarantees or other forms of financial security issued by credit worthy financial institutions.


15



Accounts receivable, unbilled and retainage
 
Accounts receivable, unbilled and retainage consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Accounts receivable, unbilled
 
$
222,636

 
$
342,587

Retainage
 
237,802

 
58,400

Accounts receivable, unbilled and retainage
 
$
460,438

 
$
400,987


Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer. This is common for long-term construction contracts. For example, we recognize revenue from contracts for the construction and sale of solar power systems which include the sale of project assets over the construction period using applicable accounting methods. One applicable accounting method is the percentage-of-completion method under which sales and gross profit are recognized as construction work is performed based on the relationship between actual costs incurred compared to the total estimated costs for constructing the project. Under this accounting method, revenue can be recognized in advance of billing the customer, resulting in an amount recorded to Accounts receivable, unbilled and retainage. Once we meet the billing criteria under a construction contract, we bill our customers accordingly and reclassify the Accounts receivable, unbilled and retainage to Accounts receivable trade, net. Billing requirements vary by contract, but are generally structured around completion of certain construction milestones.
 
Also included within Accounts receivable, unbilled and retainage is the current portion of retainage. Retainage refers to the portion of the contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. Retainage included within Accounts receivable, unbilled and retainage is expected to be billed and collected within the next 12 months.

Retainage that is noncurrent in nature is expected to be collected in the second half of 2014 through 2015, after certain construction milestones have been met.

Inventories

Inventories consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Raw materials
 
$
177,070

 
$
184,006

Work in process
 
11,672

 
14,868

Finished goods (solar modules)
 
278,187

 
370,422

Inventories
 
$
466,929

 
$
569,296

Inventories — current
 
$
334,261

 
$
434,921

Inventories — noncurrent (1)
 
$
132,668

 
$
134,375


(1) We purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our operating cycle (which is 12 months). We classify the raw materials that we do not expect to be consumed within our operating cycle as noncurrent.

We regularly review the cost of inventories, including noncurrent inventories, against their estimated market value and record a lower of cost or market write-down if any inventories have a cost in excess of their estimated market value as defined by ASC 330, Inventories. We also regularly evaluate the quantities and values of our inventories, including noncurrent inventories, in light of current market conditions and market trends among other factors and record write-downs for any quantities in excess of demand and for any new obsolescence.

Balance of systems parts

Balance of systems parts represent mounting, electrical and other construction parts purchased for solar power plants to be constructed or currently under construction, which we hold title to and are not yet installed in a solar power plant. These parts include posts, tilt brackets, tables, harnesses, combiner boxes, inverters, cables, tracker equipment and other parts we purchase or

16



assemble for the solar power plants we construct. Balance of systems parts does not include any solar modules that we manufacture. We carry these parts at the lower of cost or market, with market being based primarily on recoverability through installation in a solar power system. 

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Prepaid expenses
 
$
31,099

 
$
39,582

Derivative instruments 
 
3,079

 
7,230

Deferred costs of goods sold
 
2,102

 
96,337

Other current assets
 
80,887

 
64,219

Prepaid expenses and other current assets
 
$
117,167

 
$
207,368


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Buildings and improvements
 
$
459,280

 
$
446,133

Machinery and equipment
 
1,421,761

 
1,415,632

Office equipment and furniture
 
123,553

 
117,228

Leasehold improvements
 
47,230

 
49,367

Depreciable property, plant and equipment, gross
 
2,051,824

 
2,028,360

Accumulated depreciation
 
(852,763
)
 
(803,501
)
Depreciable property, plant and equipment, net
 
1,199,061

 
1,224,859

Land
 
22,209

 
22,256

Construction in progress
 
128,809

 
51,133

Stored assets (1)
 
210,829

 
227,134

Property, plant and equipment, net
 
$
1,560,908

 
$
1,525,382


(1)
Consists of machinery and equipment (“stored assets”) that were originally purchased for installation in our previously planned manufacturing capacity expansions. We intend to install and place the stored assets into service when such assets are required or beneficial to our existing installed manufacturing capacity or when market demand supports additional or market specific manufacturing capacity. As the stored assets are neither in the condition or location to produce modules as intended, we will not begin depreciation until such assets are placed into service. The stored assets are evaluated for impairment under a held and used impairment model whenever events or changes in business circumstances arise, including consideration of technological obsolescence, that may indicate that the carrying amount of the long-lived assets may not be recoverable. We ceased the capitalization of interest on such stored assets once they were physically received from the related machinery and equipment suppliers.

Depreciation of property, plant and equipment was $57.8 million and $116.0 million for the three and six months ended June 30, 2013, respectively, and was $64.0 million and $136.6 million for the three and six months ended June 30, 2012, respectively.

From time to time, we have received grants for the construction or expansion of our manufacturing facilities. We account for any such grants as a reduction to the carrying value of the property, plant and equipment they fund. During the first quarter of 2013, we repaid the remaining €6.3 million of grants received in 2011, including outstanding interest due, as a result of the closure of our Frankfurt (Oder) manufacturing facility.

See Note 4. “Restructuring,” for more information on the long-lived asset impairments and grant repayments related to our April 2012 European restructuring.

Capitalized interest

17




We capitalized interest costs incurred into property, plant and equipment or project assets as follows during the three and six months ended June 30, 2013 and June 30, 2012 (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Interest cost incurred
 
$
(3,167
)
 
$
(9,318
)
 
$
(6,442
)
 
$
(16,050
)
Interest cost capitalized —– property, plant and equipment
 
736

 
769

 
1,046

 
2,822

Interest cost capitalized —– project assets
 
1,556

 
1,177

 
3,771

 
4,936

Interest expense, net
 
$
(875
)
 
$
(7,372
)
 
$
(1,625
)
 
$
(8,292
)

Project assets and deferred project costs

Project assets consist primarily of costs relating to solar power projects in various stages of development and construction that we capitalize prior to entering into a definitive sales agreement for the solar power project including projects that have begun commercial operation under the project PPAs. These costs include costs for land and costs for developing and constructing a PV solar power system. Development costs can include legal, consulting, permitting, interconnection, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred project costs on our condensed consolidated balance sheet until the sale is completed and we have met all of the criteria to recognize the sale as revenue, which is typically subject to real estate revenue recognition requirements. We expense project assets to cost of sales after each respective project asset is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). We classify project assets generally as noncurrent due to the nature of solar power projects (long-lived assets) and the time required to complete all activities to develop, construct, and sell projects, which is typically longer than 12 months.

Deferred project costs represent (i) costs that we capitalize as project assets for arrangements that we account for as real estate transactions after we have entered into a definitive sales arrangement, but before the sale is completed or before we have met all criteria to recognize the sale as revenue, (ii) recoverable pre-contract costs that we capitalize for arrangements accounted for as long-term construction contracts prior to entering into a definitive sales agreement, or (iii) costs that we capitalize for arrangements accounted for as long-term construction contracts after we have signed a definitive sales agreement, but before all revenue recognition criteria have been met. We classify deferred project costs as current if completion of the sale and the meeting of all revenue recognition criteria is expected within the next 12 months.

If a project asset is completed and begins commercial operation prior to entering into or the closing of a sales arrangement, the completed project will remain in project assets or deferred project costs until the sale of such project closes. Any income generated by such project while it remains within project assets or deferred project costs is accounted for as a reduction to our basis in the project, which at the time of sale and meeting all revenue recognition criteria will be recorded within cost of sales.

Project assets and deferred project costs consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Project assets — land
 
$
810

 
$
9,164

Project assets — development costs including project acquisition costs
 
251,835

 
157,489

Project assets — construction costs
 
71,827

 
192,171

Project assets — projects in commercial operation under project PPAs
 
205,283

 

Project assets 
 
$
529,755

 
$
358,824

Deferred project costs — current
 
$
1,004,778

 
$
21,390

Deferred project costs — non-current
 
29,396

 
486,654

Deferred project costs
 
1,034,174

 
$
508,044

Total project assets and deferred project costs
 
$
1,563,929

 
$
866,868


Note Receivable


18



On April 8, 2009, we entered into a credit facility agreement with a solar power project entity of one of our customers for an available amount of €17.5 million to provide financing for a PV solar power system. The credit facility replaced a bridge loan that we had made to this entity. The credit facility bears interest at 8% per annum and is due on December 31, 2026. As of June 30, 2013 and December 31, 2012, the balance on this credit facility was €7.0 million. The outstanding amount of this credit facility is included within “Other assets” on our condensed consolidated balance sheets.

Note Receivable, Affiliate

In January 2012, we contributed an immaterial amount for a 50% ownership interest in a newly formed limited liability company (“property company”), which was formed for the sole purpose of holding land for use in the development of a certain solar power project. One of our customers also contributed an immaterial amount for the remaining 50% ownership interest in the property company. The activities for the property company were governed by a shareholders agreement. The intent of the shareholders agreement was to outline the parameters of the arrangement with our customer, whereby we would supply solar modules to our customer for the solar power project and our customer would develop, construct, and sell the project. The shareholders agreement also required each party to consent to all decisions made for the most significant activities of the property company. There were no requirements for us to make further contributions to the property company and the proceeds from the sale of the project were to be divided equally between us and our customer after the repayment of all project development related costs including the repayment of the loan discussed further below.

We also entered into a loan agreement, with a 6% per annum interest rate, with the property company, which is considered an affiliate, which required that the proceeds be used to purchase the project land and to pay for certain land development costs. Construction of the project was substantially completed during September 2012. During the first quarter of 2013, the then outstanding principal balance on this loan of €13.4 million was repaid in full. Additionally, €1.1 million of interest income was received under the terms of the loan, representing the cumulative interest due from the property company since the inception of the loan.

The property company is considered a variable interest entity and our previous ownership interest in and our loan to the property company were considered variable interests. We accounted for our investment in the property company under the equity method of accounting as we concluded we were not the primary beneficiary as we did not have the power to make decisions for the most significant activities of the property Company. We had no remaining ownership interest or equity method investment balance related to the property company as of June 30, 2013.

Intangible Assets

Prepaid expenses and other current assets” and “Other assets” include acquired intangible assets, the majority of which were acquired during the three months ended June 30, 2013 as part of our TetraSun acquisition described in Note 5. “Acquisitions.” Prepaid expenses and other current assets and Other assets also include our internally-generated intangible assets, substantially all of which are patents on technologies related to our products and production processes. We record an asset for patents, after the patent has been issued, based on the legal, filing, and other costs incurred to secure them. We amortize intangible assets on a straight-line basis over their estimated useful lives once the intangible assets meet the criteria to be amortized.

Intangible assets consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Intangible assets, gross
 
$
48,939

 
$
9,139

Accumulated amortization
 
(5,700
)
 
(5,404
)
Intangible assets, net
 
$
43,239

 
$
3,735


$39.1 million of the $48.9 million of Intangible assets, gross as of June 30, 2013 consists of IPR&D related to assets that were acquired as part of our TetraSun acquisition. Such assets will be amortized over their estimated useful lives upon successful completion of the project or expensed earlier if impaired.

Accrued expenses

Accrued expenses consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):

19



 
 
June 30,
2013
 
December 31,
2012
Accrued compensation, benefits and severance
 
$
41,552

 
$
105,677

Accrued property, plant and equipment
 
22,131

 
20,564

Accrued inventory and balance of systems parts
 
55,910

 
52,408

Accrued project assets and deferred project costs
 
85,989

 
76,133

Product warranty liability (Note 14)
 
62,989

 
90,581

Accrued expenses in excess of normal product warranty liability and related expenses (1)
 
64,252

 
75,020

Other accrued expenses
 
58,941

 
134,050

Accrued expenses
 
$
391,764

 
$
554,433


(1) Accrued expenses in excess of normal product warranty liability and related expenses consists primarily of commitments to certain customers, each related to the manufacturing excursion occurring during the period between June 2008 to June 2009 (“2008-2009 manufacturing excursion”), whereby certain modules manufactured during that time period may experience premature power loss once installed in the field. Additionally, included in such accrued expenses are commitments to certain customers related to a workmanship issue potentially affecting solar modules manufactured between October 2008 to June 2009, as a limited number of the modules manufactured during that time utilized a new material and process to attach the cord plate (junction box) to the module which may not adhere securely over time.

Our best estimate for such remediation programs is based on evaluation and consideration of currently available information, including the estimated number of potentially affected modules in the field, historical experience related to our remediation efforts, customer-provided data related to potentially affected systems, the estimated costs of performing the removal, replacement and logistical services and the post-sale expenses covered under our remediation program. If any of our estimates prove incorrect, we could be required to accrue additional expenses.

Deferred Revenue

We recognize deferred revenue as net sales only after all revenue recognition criteria are met. We expect to recognize these amounts as net sales within the next 12 months.

Payments and billings for deferred project costs

Payments and billings for deferred project costs represent customer payments received or customer billings made under the terms of solar power project related sales contracts for which all revenue recognition criteria for real estate transactions have not yet been met. The associated solar power project related costs are included as deferred project costs. We classify such amounts as current or noncurrent depending upon when all revenue recognition criteria are expected to be met, consistent with the classification of the associated deferred project costs.
Other current liabilities

Other current liabilities consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Derivative instruments 
 
$
4,759

 
$
5,825

Deferred tax liabilities
 

 
2,226

Billings in excess of costs and estimated earnings (1)
 
4,044

 
2,422

Other
 
52,346

 
21,824

Other current liabilities
 
$
61,149

 
$
32,297


(1) Billings in excess of costs and estimated earnings represents billings made or payments received in excess of revenue recognized on contracts accounted for under the percentage-of-completion method. Typically, billings are made based on the completion of certain construction milestones as provided for in the sales arrangement and the timing of revenue recognition may be different from when we can bill or collect from a customer.

Other liabilities

20




Other liabilities consisted of the following at June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30,
2013
 
December 31,
2012
Product warranty liability
 
$
126,268

 
$
101,015

Other taxes payable
 
117,542

 
102,599

Billings in excess of costs and estimated earnings (1)
 
45,334

 
47,623

Other
 
85,727

 
40,979

Other liabilities
 
$
374,871

 
$
292,216


(1) Billings in excess of costs and estimated earnings represents billings made or payments received in excess of revenue recognized on contracts accounted for under the percentage-of-completion method. Typically, billings are made based on the completion of certain construction milestones as provided for in the sales arrangement and the timing of revenue recognition may be different from when we can bill or collect from a customer.

Note 10. Equity Offering

During June 2013, we completed an equity offering of 9,747,000 shares of our common stock at a public offering price of $46.00 per share. Net proceeds from the equity offering were $428.2 million, after deducting $17.9 million of underwriting discounts and offering expenses of $2.2 million. We intend to use the proceeds for general corporate purposes, which may include acquisitions of under development photovoltaic solar power system projects, investments in photovoltaic solar power system projects that will be jointly developed with strategic partners and capital expenditures or strategic investments to develop certain business units and expand in new geographies.

Note 11. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our consolidated net assets, financial position, results of operations, and cash flows. We use derivative instruments to hedge against certain risks such as these, and we only hold derivative instruments for hedging purposes, not for speculative or trading purposes.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. As required by ASC 815, Derivatives and Hedging, we report all of our derivative instruments that are within the scope of that accounting standard at fair value. We account for changes in the fair value of derivative instruments within accumulated other comprehensive income (loss) if the derivative instruments qualify for hedge accounting under ASC 815. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. See Note 12. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair value of derivative instruments included in our condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 (in thousands):
 
 
June 30, 2013
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
Cross-currency swap contract
 
$

 
$
659

 
$
2,965

Interest rate swap contracts
 

 
369

 
591

Total derivatives designated as hedging instruments
 
$

 
$
1,028

 
$
3,556

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815:
 
 

 
 

Foreign exchange forward contracts
 
$
3,079

 
$
3,731

 
$

Total derivatives not designated as hedging instruments
 
$
3,079

 
$
3,731

 
$

Total derivative instruments
 
$
3,079

 
$
4,759

 
$
3,556


21




 
 
December 31, 2012
 
 
Prepaid Expenses and Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
Foreign exchange forward contracts
 
$
2,121

 
$

 
$

Cross-currency swap contract
 

 
316

 
1,582

Interest rate swap contracts
 

 
473

 
994

Total derivatives designated as hedging instruments
 
$
2,121

 
$
789

 
$
2,576

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815:
 
 

 
 

Foreign exchange forward contracts
 
$
5,109

 
$
5,036

 
$

Total derivatives not designated as hedging instruments
 
$
5,109

 
$
5,036

 
$

Total derivative instruments
 
$
7,230

 
$
5,825

 
$
2,576


The impact of offsetting balances associated with derivative instruments designated as hedging instruments under ASC 815 is shown below (in thousands):

 
 
June 30, 2013
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in Consolidated Balance Sheet
 
 
 
 
Gross Asset (Liability)
 
Gross Offset in Consolidated Balance Sheet
 
Net Amount Recognized in Financial Statements
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Cross-currency swap contracts
 
$
(3,624
)
 

 
(3,624
)
 

 

 
$
(3,624
)
Interest rate swap contracts
 
$
(960
)
 

 
(960
)
 

 

 
$
(960
)

 
 
December 31, 2012
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in Consolidated Balance Sheet
 
 
 
 
Gross Asset (Liability)
 
Gross Offset in Consolidated Balance Sheet
 
Net Amount Recognized in Financial Statements
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Foreign exchange forward contracts
 
$
2,121

 

 
2,121

 

 

 
$
2,121

Cross-currency swap contracts
 
$
(1,898
)
 

 
(1,898
)
 

 

 
$
(1,898
)
Interest rate swap contracts
 
$
(1,467
)
 

 
(1,467
)
 

 

 
$
(1,467
)

The following tables present the amounts related to derivative instruments designated as cash flow hedges under ASC 815 affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the three and six months ended June 30, 2013 and June 30, 2012 (in thousands):

22



 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contract
 
Cross Currency Swap Contract
 
Total
Balance in other comprehensive income (loss) at December 31, 2012
 
$
8,980

 
$
(1,467
)
 
$
(8,031
)
 
$
(518
)
Amounts recognized in other comprehensive income (loss)
 
4,135

 
100

 
(1,604
)
 
2,631

Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring
 
(13,115
)
 

 

 
(13,115
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency gain
 

 

 
1,974

 
1,974

Interest expense
 

 
209

 
85

 
294

Balance in other comprehensive income (loss) at March 31, 2013
 
$

 
$
(1,158
)
 
$
(7,576
)
 
$
(8,734
)
Amounts recognized in other comprehensive income (loss)
 

 
2

 
(313
)
 
(311
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency gain
 

 

 
2,912

 
2,912

Interest expense
 

 
196

 
106

 
302

Balance in other comprehensive income (loss) at June 30, 2013
 
$

 
$
(960
)
 
$
(4,871
)
 
$
(5,831
)

 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contracts
 
Cross Currency Swap Contract
 
Total
Balance in other comprehensive income (loss) at December 31, 2011
 
$
33,751

 
$
(2,571
)
 
$
(5,899
)
 
$
25,281

Amounts recognized in other comprehensive (loss) income
 
(11,341
)
 
(914
)
 
4,347

 
(7,908
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Net sales
 
(6,710
)
 

 

 
(6,710
)
Foreign currency gain (loss)
 

 

 
(5,003
)
 
(5,003
)
Interest expense
 

 
244

 
71

 
315

Balance in other comprehensive income (loss) at March 31, 2012
 
$
15,700

 
$
(3,241
)
 
$
(6,484
)
 
$
5,975

Amounts recognized in other comprehensive income (loss)
 
5,825

 
(334
)
 
(5,989
)
 
(498
)
Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring
 
(3,385
)
 

 

 
(3,385
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Foreign currency gain (loss)
 

 

 
5,382

 
5,382

Interest expense
 

 
2,084

 
131

 
2,215

Balance in other comprehensive income (loss) at June 30, 2012
 
$
18,140

 
$
(1,491
)
 
$
(6,960
)
 
$
9,689


We recorded immaterial amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the six months ended June 30, 2013 and June 30, 2012 directly to other income (expense), net. In addition, we recognized losses of $0.4 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within other income (expense), net during the three and six months ended June 30, 2013, respectively. We recognized gains of $2.2 million and $1.9 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within other income (expense), net during the three and six months ended and June 30, 2012, re