10-Q 1 form10-q.htm FORM 10-Q form10-q.htm




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

Form 10-Q

(Mark one)
 
   
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 26, 2009
   
 
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
(I.R.S. Employer
incorporation or organization)
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 R 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 R 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 R
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 R

As of October 23, 2009 there were 85,107,744 shares of the registrant’s common stock, par value $0.001, outstanding.







 

 
 
 

FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2009

TABLE OF CONTENTS

 
 
Page
Part I.
Financial Information (Unaudited)
 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 26, 2009 and September 27, 2008
3
 
Condensed Consolidated Balance Sheets as of September 26, 2009 and December 27, 2008
4
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 26, 2009 and September 27, 2008
5
 
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 4.
Controls and Procedures
44
Part II.
Other Information
44
Item 1.
Legal Proceedings
44
Item 1A.
Risk Factors
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
47
Item 6.
Exhibits
48
Signature
 
49
Exhibit Index
 
50



 
Page | 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)

   
Three Months Ended
   
Nine Months Ended
 
 
 
 
September 26,
2009
   
September 27,
2008
   
September 26,
2009
   
September 27,
2008
 
Net sales
  $ 480,851     $ 348,694     $ 1,424,935     $ 812,650  
Cost of sales
    235,858       153,251       646,562       368,183  
Gross profit
    244,993       195,443       778,373       444,467  
Operating expenses:
                               
Research and development
    24,136       9,952       54,445       22,437  
Selling, general and administrative
    53,990       48,995       176,231       121,292  
Production start-up
    4,076       6,344       12,809       23,727  
Total operating expenses
    82,202       65,291       243,485       167,456  
Operating income
    162,791       130,152       534,888       277,011  
Foreign currency gain (loss)
    114       (1,889 )     2,187       (468 )
Interest income
    2,398       5,323       6,449       16,931  
Interest expense, net
    (89 )     (127 )     (4,851 )     (131 )
Other expense, net
    (247 )     (360 )     (2,676 )     (1,179 )
Income before income taxes
    164,967       133,099       535,997       292,164  
Income tax expense
    11,623       33,830       37,479       76,605  
Net income
  $ 153,344     $ 99,269     $ 498,518     $ 215,559  
Net income per share:
                               
Basic
  $ 1.82     $ 1.23     $ 5.99     $ 2.70  
Diluted
  $ 1.79     $ 1.20     $ 5.88     $ 2.63  
Weighted-average number of shares used in per share calculations:
                               
Basic
    84,179       80,430       83,196       79,789  
Diluted
    85,892       82,436       84,724       82,016  

See accompanying notes to these condensed consolidated financial statements.




 
Page | 3
 


FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 
 
 
September 26,
2009
   
December 27,
2008
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 364,814     $ 716,218  
Marketable securities — current
    158,847       76,042  
Accounts receivable, net
    348,965       61,703  
Inventories — current
    178,032       121,554  
Project assets — current
    58,017        
Economic development funding receivable
          668  
Deferred tax asset, net — current
    15,362       9,922  
Prepaid expenses and other current assets
    79,355       91,294  
Total current assets
    1,203,392       1,077,401  
Property, plant and equipment, net
    962,732       842,622  
Project assets — noncurrent
    102,692        
Deferred tax asset, net — noncurrent
    117,449       61,325  
Marketable securities — noncurrent
    306,415       29,559  
Restricted cash and investments — noncurrent
    37,173       30,059  
Investment in related party
    25,000       25,000  
Goodwill
    284,005       33,829  
Inventories — noncurrent
    11,434        
Other assets — noncurrent
    44,780       14,707  
Total assets
  $ 3,095,072     $ 2,114,502  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Accounts payable
  $ 72,338     $ 46,251  
Income tax payable
    17,555       99,938  
Accrued expenses
    142,490       140,899  
Current portion of long-term debt
    29,169       34,951  
Other liabilities — current
    85,107       59,738  
Total current liabilities
    346,659       381,777  
Accrued collection and recycling liabilities
    76,932       35,238  
Long-term debt
    163,320       163,519  
Other liabilities — noncurrent
    48,987       20,926  
Total liabilities
    635,898       601,460  
Stockholders’ equity:
               
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 85,071,436 and 81,596,810 shares issued and outstanding at September 26, 2009 and December 27, 2008, respectively
    85       82  
Additional paid-in capital
    1,632,911       1,176,156  
Contingent consideration
    2,844        
Accumulated earnings
    859,743       361,225  
Accumulated other comprehensive loss
    (36,409 )     (24,421 )
Total stockholders’ equity
    2,459,174       1,513,042  
Total liabilities and stockholders’ equity
  $ 3,095,072     $ 2,114,502  

See accompanying notes to these condensed consolidated financial statements.




 
Page | 4
 


FIRST SOLAR, INC. AND SUBSIDIARIES

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

   
Nine Months Ended
 
 
 
 
September 26,
2009
   
September 27,
2008
 
Cash flows from operating activities:
           
Cash received from customers
  $ 1,169,345     $ 779,209  
Cash paid to suppliers and associates
    (770,985 )     (513,583 )
Interest received
    4,266       15,306  
Interest paid
    (7,527 )     (3,003 )
Income taxes paid, net of refunds
    (123,011 )     (3,202 )
Excess tax benefit from share-based compensation arrangements
    (9,476 )     (13,736 )
Other operating activities
    (1,217 )     (1,179 )
Net cash provided by operating activities
    261,395       259,812  
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (210,757 )     (330,610 )
Purchases of marketable securities
    (512,116 )     (274,262 )
Proceeds from maturities of marketable securities
    124,576       373,367  
Proceeds from sales of marketable securities
    29,784       49,450  
Investment in note receivable
    (45,495 )      
Payments received on note receivable
    14,871        
Increase in restricted investments
    (4,411 )     (15,254 )
Acquisitions, net of cash acquired
    318        
Other investing activities
    (1,756 )      
Net cash used in investing activities
    (604,986 )     (197,309 )
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    4,685       14,107  
Repayment of long-term debt
    (63,699 )     (34,833 )
Proceeds from issuance of debt, net of issuance costs
    44,820       94,090  
Excess tax benefit from share-based compensation arrangements
    9,476       13,736  
Proceeds from economic development funding
    615       35,661  
Other financing activities
    (2 )     (5 )
Net cash (used in) provided by financing activities
    (4,105 )     122,756  
Effect of exchange rate changes on cash and cash equivalents
    (3,708 )     (7,744 )
Net increase (decrease) in cash and cash equivalents
    (351,404 )     177,515  
Cash and cash equivalents, beginning of the period
    716,218       404,264  
Cash and cash equivalents, end of the period
  $ 364,814     $ 581,779  
Supplemental disclosure of noncash investing and financing activities:
               
Property, plant and equipment acquisitions funded by liabilities
  $     $ 31,468  

See accompanying notes to these condensed consolidated financial statements.

 

 
Page | 5
 


FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Nine Months ended September 26, 2009

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

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

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

Note 2. Summary of Significant Accounting Policies

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

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


Note 3. Recent Accounting Pronouncements

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

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

In September 2009, the FASB issued FASB Accounting Standards Codification Update (ASU) 2009-05, Measuring Liabilities at Fair Value. The fair value measurement of a liability assumes transfer to a market participant on the measurement date, not a settlement of the liability with the counterparty. ASU 2009-05 describes various valuation methods that can be applied to estimating the fair values of liabilities, requires the use of observable inputs and minimizes the use of unobservable valuation inputs. ASU 2009-05 is effective for the fourth quarter of 2009. We do not expect that the adoption of ASU 2009-05 will have a material impact on our financial position, results of operations or cash flows.
 
 
                                          
Page | 6

In September 2009, the FASB issued ASU 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. ASU 2009-06 provides guidance on how to account for uncertainty in income taxes, especially for tax payments made by an entity attributable to the entity or attributable to the owners. In addition, ASU 2009-06 clarifies management’s determination of the taxable status of an entity and amends certain disclosure requirements. ASU 2009-06 is effective for the third quarter of 2009. The adoption of ASU 2009-06 had no impact on our financial position, results of operations or cash flows.

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. ASU 2009-13 revises certain accounting for revenue arrangements with multiple deliverables, in particular when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and to allocate the arrangement consideration. ASU 2009-13 is effective for the first quarter of 2011, with early adoption permitted. We do not expect that the adoption of ASU 2009-13 will have a material impact on our financial position, results of operations or cash flows.

Note 4. Acquisition

 On April 3, 2009, we completed the acquisition of the solar power project development business (the Project Business) of OptiSolar Inc. (OptiSolar). Pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated March 2, 2009, by and among First Solar, Inc., First Solar Acquisition Corp. (Merger Sub), OptiSolar and OptiSolar Holdings LLC (OptiSolar Holdings), Merger Sub merged with and into OptiSolar, with OptiSolar surviving as a wholly-owned subsidiary of First Solar, Inc. (the Merger). Pursuant to the Merger, all the outstanding shares of common stock of OptiSolar held by OptiSolar Holdings were exchanged for 2,972,420 shares of First Solar common stock, par value $0.001 per share (the Merger Shares), of which 732,789 shares were issued and deposited with an escrow agent to support certain indemnification obligations of OptiSolar Holdings. Also, 355,096 shares were holdback shares as further described below under “Contingent Consideration” (the “Holdback Shares”). As of September 26, 2009, 2,951,256 Merger Shares had been issued. The period during which claims for indemnification from the escrow fund may be initiated commenced on April 3, 2009 and will end on April 3, 2011.

Purchase Price Consideration

The total consideration for this acquisition based on the closing price of our common stock on April 3, 2009 of $134.38 per share was $399.4 million.

Contingent Consideration

 Pursuant to the Merger Agreement, of the 2,972,420 Merger Shares, as of April 3, 2009, 355,096 shares were Holdback Shares that were issuable to OptiSolar Holdings upon satisfaction of conditions relating to certain then-existing liabilities of OptiSolar. As of September 26, 2009, 333,932 Holdback Shares had been issued to OptiSolar Holdings, with 331,523 Holdback Shares issued during the three months ended September 26, 2009. The estimated fair value of this contingent consideration was $2.8 million at September 26, 2009 (relating to 21,164 Holdback Shares remaining to be issued as of such date) and $47.7 million on April 3, 2009 (relating to 355,096 Holdback Shares to be issued as of such date), and has been classified separately within stockholders’ equity on our balance sheet.

Purchase Price Allocation

We accounted for this acquisition using the acquisition method in accordance with ASC 805. Accordingly, we allocated the purchase price to the acquired assets and liabilities based on their estimated fair values at the acquisition date of April 3, 2009, as summarized in the following table (in thousands):

Tangible assets acquired
  $ 10,175  
Project assets
    103,888  
Deferred tax assets
    43,600  
Deferred tax liability
    (8,405 )
Goodwill
    250,176  
Total purchase consideration
  $ 399,434  

 
Page | 7
 
 
The fair value of net tangible assets acquired on April 3, 2009 consisted of the following (in thousands):

Cash
  $ 318  
Prepaid expenses and other current assets
    5,003  
Property, plant and equipment
    165  
Project assets – Land
    6,100  
Total identifiable assets acquired
    11,586  
Accounts payable and other liabilities
    (1,411 )
   Total liabilities assumed
    (1,411 )
        Net identifiable assets acquired
  $ 10,175  

Goodwill

We recorded the excess of the acquisition date fair value of consideration transferred over the estimated fair value of the net tangible assets and intangible assets acquired as goodwill. We adjusted goodwill downward during the third quarter of 2009 by $11.0 million as additional information relating to deferred tax assets became available. We have allocated $248.8 million and $1.4 million of this goodwill to our components reporting segment and our systems segment (reported under “Other” in our disclosure of segment operating results), respectively. This goodwill is not deductible for tax purposes.

  Acquired project assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the acquired project development business. In our determination of the fair value of the project assets acquired, we considered among other factors, three generally accepted valuation approaches: the income approach, market approach and cost approach. We selected the approaches that are most indicative of fair value of the assets acquired. We used the income approach to calculate the fair value of the acquired projects assets based on estimates and assumptions of future performance of these projects assets provided by OptiSolar’s and our management. We used the market approach to determine the fair value of the land acquired with those assets.

         Pro Forma Information

   The acquired OptiSolar business has been engaged in the development and construction of solar power projects. The costs related to these activities are largely capitalized, and not charged against earnings until the respective solar power project is sold to a customer, constructed for a customer or we determine that the project is not commercially viable; as of September 26, 2009, we had not yet reached the point of sale for any of the projects in the portfolio we acquired from OptiSolar. Therefore, if the OptiSolar acquisition had been completed on December 28, 2008 (the beginning of our fiscal year 2009) our total revenue, net income, and basic and diluted earnings per common share would have not materially changed from the amounts that we have previously reported.

   Note 5. Goodwill and Intangible Assets

Goodwill

On November 30, 2007, we acquired 100% of the outstanding membership interests of Turner Renewable Energy, LLC. Under the purchase method of accounting, we allocated $33.4 million to goodwill through December 29, 2007, which represents the excess of the purchase price over the fair value of the identifiable net tangible and intangible assets of Turner Renewable Energy, LLC. All of this goodwill was allocated to our systems segment. At September 26, 2009 and December 27, 2008, the carrying amount of this goodwill was $33.8 million.
 
 
Page | 8

On April 3, 2009, we acquired the solar power project development business of OptiSolar. Under the acquisition method of accounting, we allocated $261.1 million to goodwill, which primarily represents the synergies and economies of scale expected from acquiring OptiSolar’s project pipeline and using our solar modules in the acquired projects. During the three months ended September 26, 2009, we adjusted goodwill downward by $11.0 million as additional information regarding deferred tax assets became available. We have allocated $248.8 million and $1.4 million of this goodwill to our components reporting segment and systems segment (reported under “Other” in our disclosure of segment operating results), respectively. At September 26, 2009, the carrying amount of this goodwill was $250.2 million. See Notes 4 and 20 to our condensed consolidated financial statements for additional information about this acquisition.

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

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

(1)  
The goodwill adjustment was primarily the result of adjustments to the amount of acquired deferred tax assets.

ASC 350, Intangibles – Goodwill and Other, requires us to test goodwill for impairment at least annually, or sooner, if facts or circumstances between scheduled annual tests indicate that it is more likely than not that the fair value of a reporting unit that has goodwill might be less than its carrying value. We performed our goodwill impairment tests in the fourth fiscal quarter of the year ended December 27, 2008. Based on that test, we concluded that our goodwill was not impaired. We have also concluded that there have been no changes in facts and circumstances since the date of that test, and since the April 3, 2009 OptiSolar acquisition, that would trigger an interim goodwill impairment test.
 
 
Acquisition Related Intangible Assets

In connection with the acquisition of Turner Renewable Energy, LLC, we identified intangible assets that represent customer contracts already in progress and future customer contracts not yet started at the time of acquisition. We amortize the acquisition date fair values of these assets using the percentage of completion method.

Information regarding our acquisition-related intangible assets that are being amortized was as follows (in thousands):

   
As of September 26, 2009
   
As of December 27, 2008
 
 
 
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Value
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Value
 
Customer contracts in progress at the acquisition date
  $ 62     $ 62     $     $ 62     $ 58     $ 4  
Customer contracts executed after the acquisition date
    394       394             394       242       152  
Total
  $ 456     $ 456     $     $ 456     $ 300     $ 156  

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

Project Assets

In connection with the acquisition of the solar power project development business of OptiSolar, we measured at fair value certain project assets based on the varying development stages of each project asset on the acquisition date. We will expense these projects assets as each respective solar power project is sold to a customer, constructed for a customer or if we determine that the project is not commercially viable. See also Note 8 to our condensed consolidated financial statements about balances for project assets.
 
 
Page | 9

Note 6. Cash and Investments

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

 
 
 
September 26,
2009
   
December 27,
2008
 
Cash and cash equivalents:
           
Cash
  $ 136,477     $ 603,434  
Cash equivalents:
               
Federal agency debt
          38,832  
Money market mutual fund
    228,337       73,952  
Total cash and cash equivalents
    364,814       716,218  
Marketable securities:
               
Federal agency debt
    124,390       68,086  
Foreign agency debt
    144,590       6,977  
Supranational debt
    71,240        
Corporate debt securities
    114,926       30,538  
Foreign government obligations
    10,116        
Total marketable securities
    465,262       105,601  
Total cash, cash equivalents and marketable securities
  $ 830,076     $ 821,819  

We have classified our marketable securities as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as part of accumulated other comprehensive income until realized. We report realized gains and losses on the sale of our marketable securities in earnings, computed using the specific identification method. During the three months ended September 26, 2009, we did not realize any gains or losses on our marketable securities. During the nine months ended September 26, 2009, we realized an immaterial amount in gains and did not realize any losses on our marketable securities. During the three and nine months ended September 27, 2008, we realized $0.2 million and $0.6 million in gains and $0.3 million and $0.4 million in losses, respectively, on our marketable securities. See Note 10 to our condensed consolidated financial statements for information about the fair value measurement of our marketable securities.

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

The following table summarizes unrealized gains and losses related to our investments in marketable securities designated as available-for-sale by major security type (in thousands):

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

   
As of December 27, 2008
 
 
 
Security Type
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Federal agency debt
  $ 67,813     $ 273     $     $ 68,086  
Foreign agency debt
    6,990             13       6,977  
Corporate debt securities
    30,425       129       16       30,538  
Total
  $ 105,228     $ 402     $ 29     $ 105,601  

 
Page | 10
 
 
Contractual maturities of our available-for-sale marketable securities as of September 26, 2009 and December 27, 2008 were as follows (in thousands):

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

   
As of December 27, 2008
 
 
 
Maturity
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
One year or less
  $ 75,856     $ 199     $ 13     $ 76,042  
One year to two years
    29,372       203       16       29,559  
Total
  $ 105,228     $ 402     $ 29     $ 105,601  

The net unrealized gain of $1.5 million and $0.4 million as of September 26, 2009 and December 27, 2008, respectively, on our available-for-sale marketable securities was primarily the result of changes in interest rates. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better and limits the security types, issuer concentration and duration of the investments.

The following table shows gross unrealized losses and estimated fair values for those investments that were in an unrealized loss position as of September 26, 2009 and December 27, 2008, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

   
As of September 26, 2009
 
   
In Loss Position for
Less Than 12 Months
   
In Loss Position for
12 Months or Greater
   
Total
 
 
 
Security Type
 
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
 
Supranational debt
  $ 27,214     $ 85     $     $     $ 27,214     $ 85  
Corporate debt securities
    3,018       41                   3,018       41  
Total
  $ 30,232     $ 126     $     $     $ 30,232     $ 126  

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


Page | 11
Note 7. Restricted Cash and Investments

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

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

At September 26, 2009, our restricted investments consisted of long-term marketable securities that we hold to fund future costs of our solar module collection and recycling program.
 
The following table summarizes unrealized gains and losses related to our restricted investments in marketable securities designated as available-for-sale by major security type (in thousands):

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

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

Note 8. Consolidated Balance Sheet Details

Accounts receivable, net

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

 
 
September 26,
2009
   
December 27, 2008
 
Accounts receivable, gross
  $ 352,955     $ 61,703  
Allowance for doubtful account
    (3,990 )      
Accounts receivable, net
  $ 348,965     $ 61,703  

The increase in accounts receivable was mainly due to the amendment of certain of our customers’ long-term supply contracts to extend their payment terms from net 10 days to net 45 days at the end of the first quarter of 2009 and due to higher volumes shipped during the three months ended September 26, 2009.

During the three months ended September 26, 2009, we amended our Long Term Supply Contracts with certain of our customers to implement a program which extends a price rebate to certain of these customers for solar modules purchased from us. The intent of this program is to enable our customers to successfully compete in our core segments in Germany. The rebate program applies a specified rebate rate to solar modules sold for solar power projects in Germany at the beginning of each quarter for the upcoming quarter. The rebate program is subject to periodic review and we will adjust the rebate rate quarterly upward or downward as appropriate. The rebate period commenced during the third quarter of 2009 and terminates at the end of the fourth quarter of 2010. Customers need to meet certain requirements in order to be eligible for and benefit from this program.

We account for rebates as a reduction to the selling price of our solar modules and therefore as a reduction in revenue. No rebates granted under this program can be claimed in cash and all will be applied to reduce outstanding accounts receivable balances. During the three months ended September 26, 2009 we extended rebates to customers in the amount of €48.7 million ($71.5 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) which reduced our accounts receivable from these customers by such amount at September 26, 2009.
 
During the three months ended June 27, 2009, we provided an allowance  for the doubtful account receivable in the amount of $7.0 million due to the collectability of the outstanding accounts receivable from a specific customer. During the three months ended September 26, 2009 we collected $3.0 million of the overdue accounts receivable balance from this specific customer and reduced our allowance for the doubtful account accordingly.

 
Page | 12
 
Inventories

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

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

(1)  
Inventory – noncurrent represents raw materials.

Prepaid expenses and other current assets

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

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


Project Assets – Current and Noncurrent

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

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

Project assets consist primarily of costs capitalized relating to solar power projects in various stages of development. They include  costs for land and costs for developing a solar power project, including legal, consulting, permitting and other costs. Project assets acquired in connection with the acquisition of OptiSolar were measured at fair value on the acquisition date. Subsequent to the acquisition of OptiSolar, we incurred additional costs to further the development of these projects, which we capitalized. We expense these project assets as each respective solar power project is sold to a customer, constructed for a customer or if we determine that the project is not commercially viable. See also Note 5 to our condensed consolidated financial statements.


Page | 13
 
 
Property, plant and equipment, net

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

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

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


Capitalized Interest

We incurred interest cost and capitalized a portion of it (into our property, plant and equipment and project assets) as follows during the three and nine months ended September 26, 2009 and September 27, 2008 (in thousands):

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

Accrued expenses

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

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

 
Page | 14
Other current liabilities

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

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

(1)  
Settled subsequent to September 26, 2009.

 
 
Note 9. Derivative Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our net assets, financial position, results of operations and cash flows. We use derivative instruments to hedge against certain risks, such as these, and we only hold derivative instruments for hedging purposes, not for speculative or trading purposes. Our use of derivative instruments is subject to strict internal controls based on centrally defined, performed and controlled policies and procedures.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular point in time. As required by FASB ASC 815, Derivatives and Hedging, we report all of our derivative instruments at fair value on our balance sheet. Depending on the substance of the hedging purpose for our derivative instruments, we account for changes in the fair value of some of them using cash-flow-hedge accounting pursuant to ASC 815 and of others by recording the changes in fair value directly to current earnings (so-called “economic hedges”). These accounting approaches and the various classes of risk that we are exposed to in our business and the risk management systems using derivative instruments that we apply to these risks are described below. See Note 10 to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following table presents the fair values of derivative instruments included in our condensed consolidated balance sheet as of September 26, 2009 (in thousands):

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

 
Page | 15
 
The following tables present the amounts related to derivative instruments affecting our condensed consolidated statement of operations for the three and nine months ended September 26, 2009 (in thousands):

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

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

 
 
Page | 16
 
Interest Rate Risk

We use interest rate swap agreements to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use such swap agreements for speculative or trading purposes. We had interest rate swap contracts with a financial institution that effectively converted to fixed rates the variable rate of the Euro Interbank Offered Rate (Euribor) on the term loan portion of our credit facility with a consortium of banks for the financing of our German plant. These swap contracts were required under the credit facility agreement, which we repaid and terminated on June 30, 2009. Therefore, we terminated these interest rate swap contracts on June 26, 2009 and consequently recognized an interest expense of €1.7 million ($2.5 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). The termination of the interest rate swap contracts settled on June 30, 2009.

On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our Malaysian credit facility, which became effective on September 30, 2009 with a notional value of €57.3 million ($84.2 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) and pursuant to which we are entitled to receive a six-month floating interest rate, the Euro Interbank Offered Rate (Euribor), and pay a fixed rate of 2.80%. The notional amount of the interest rate swap contract is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. This derivative instrument qualifies for accounting as a cash flow hedge in accordance with FASB ASC 815, Derivatives and Hedging, and we designated it as such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at September 26, 2009.

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect many of the components of our business to have material future cash flows, including revenues and expenses that will be denominated in currencies other than the component’s functional currency. Our primary cash flow exposures are customer collections and vendor payments. Changes in the exchange rates between our components’ functional currencies and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge the value of a portion of these forecasted cash flows. As of September 26, 2009, these foreign exchange contracts hedge our forecasted future cash flows for up to 18 months. These foreign exchange contracts qualified for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of the derivative’s gain or loss in accumulated other comprehensive income (loss) and subsequently reclassify amounts into earnings when the hedged transaction is settled. We determined that these derivative financial instruments were highly effective as cash flow hedges at September 26, 2009. In addition, during the nine months ended September 26, 2009, we did not discontinue any cash flow hedges because it was probable that a forecasted transaction would not occur.

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

We expect to reclassify $51.2 million of net unrealized losses related to these forward contracts that are included in accumulated other comprehensive loss at September 26, 2009 to earnings in the following 12 months as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will be contingent upon the actual exchange rate when we realize the related forecasted transaction.

Page | 17
Transaction Exposure

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

During the nine months ended September 26, 2009, we purchased foreign exchange forward contracts to hedge balance sheet exposures related to transactions with third parties. We recognize gains or losses from the fluctuation in foreign exchange rates and the valuation of these hedging contracts in cost of sales and foreign currency gain (loss) on our consolidated statements of operations.

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

Credit Risk

We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, investments, trade accounts receivable, interest rate swap contracts and foreign exchange forward contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, investments, interest rate swap contracts and foreign exchange forward contracts with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty financial institutions.


Page | 18
Note 10. Fair Value Measurement

On December 30, 2007, the beginning of our 2008 fiscal year, we adopted ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands financial statement disclosure requirements for fair value measurements. Our initial adoption of ASC 820 was limited to our fair value measurements of financial assets and financial liabilities, as permitted by ASC 820. On December 28, 2008, the beginning of our fiscal year 2009, we adopted ASC 820 for the remainder of our fair value measurements. The implementation of the fair value measurement guidance of ASC 820 did not result in any material changes to the carrying values of our assets and liabilities.

ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
 
 
Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

 
Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

 
Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates. Following is a description of the valuation techniques that we use to measure the fair value of assets and liabilities that we measure and report at fair value on a recurring or one-time basis:

 
Cash equivalents.  At September 26, 2009, our cash equivalents consisted of money market mutual funds. We value our cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.

 
Marketable securities.  At September 26, 2009, our marketable securities consisted of federal and foreign agency debt, supranational debt, corporate debt securities and foreign government obligations. We value our marketable securities using quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2. We also consider the effect of our counterparties’ credit standings in these fair value measurements.

 
Derivative assets and liabilities.  At September 26, 2009, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies and interest rate swap contracts involving benchmark interest rates. Since our derivative assets and liabilities are not traded on an exchange, we value them using valuation models. Interest rate yield curves, foreign exchange rates and credit default swap spreads are the significant inputs into these valuation models. These inputs are observable in active markets over the terms of the instruments we hold, and accordingly, we classify these valuation techniques as Level 2. We consider the effect of our own credit standing and that of our counterparties in our valuations of our derivative assets and liabilities.

 
Product collection and recycling liability.  We account for our obligation to collect and recycle the solar modules that we sell in a similar manner to the accounting for asset retirement obligations that is prescribed by ASC 410, Asset Retirement and Environmental Obligations. When we sell solar modules, we initially record our liability for collecting and recycling those particular solar modules at the fair value of this liability, and then in subsequent periods, we accrete this fair value to the estimated future cost of collecting and recycling the solar modules. Therefore, this is a one-time nonrecurring fair value measurement of the collection and recycling liability associated with each particular solar module sold.

 
Since there is not an established market for collecting and recycling our solar modules, we value our liability using a valuation model (an income approach). This fair value measurement requires us to use significant unobservable inputs, which are primarily estimates of collection and recycling process costs and estimates of future changes in costs due to inflation and future currency exchange rates. Accordingly, we classify these valuation techniques as Level 3. We estimate collection and recycling process costs based on analyses of the collection and recycling technologies that we are currently developing; we estimate future inflation costs based on analysis of historical trends; and we estimate future currency exchange rates based on current rate information. We consider the effect of our own credit standing in our measurement of the fair value of this liability.

 
Page | 19
 
At September 26, 2009, information about inputs into the fair value measurements of our assets and liabilities that we make on a recurring basis was as follows (in thousands):

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

Fair Value of Financial Instruments

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

   
September 26, 2009
   
December 27, 2008
 
 
 
 
Carrying
Value
   
Fair
Value
   
Carrying
Value
   
Fair
Value
 
Assets:
                       
Marketable securities, current and noncurrent
  $ 465,262     $ 465,262     $ 105,601     $ 105,601  
Note receivable — current
  $ 8,574     $ 8,574     $     $  
Credit default swaps
  $     $     $ 896     $ 896  
Foreign exchange forward contract assets
  $ 8,727     $ 8,727     $ 34,035     $ 34,035  
Deposit with financial services company (restricted investment)
  $     $     $ 25,841     $ 13,039  
Restricted  investments
  $ 37,135     $ 37,135     $     $  
Investment in related party
  $ 25,000     $ 25,000     $ 25,000     $ 25,000  
Note receivable — noncurrent
  $ 25,721     $ 25,818     $     $  
Liabilities:
                               
Long-term debt, including current maturities
  $ 192,489     $ 199,337     $ 198,470     $ 204,202  
Interest rate swaps
  $ 1,104     $ 1,104     $ 1,377     $ 1,377  
Foreign exchange forward contract liabilities
  $ 57,798     $ 57,798     $ 50,410     $ 50,410  

The carrying values on our balance sheet of our cash and cash equivalents, accounts receivable, restricted cash, accounts payable, income tax payable and accrued expenses approximate their fair values due to their short maturities; therefore, we exclude them from the table above.

We estimated the fair value of our long-term debt in accordance with ASC 820 using a discounted cash flows approach (an income approach) and incorporated the credit risk of our counterparty for asset fair value measurements and our credit risk for liability fair value measurements.

 

 
Page | 20
Note 11.  Related Party Transactions

In October 2008, we made an investment, at a total cost of $25.0 million, in the preferred stock of a company based in the United States that supplies solar power plants to commercial and residential customers. This investment represents an ownership of approximately 12% of the voting interest in this company at September 26, 2009 and is our only equity interest in that entity. Since our ownership interest in this company is less than 20% and we do not have significant influence over it, we account for this investment using the cost method.

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

Note 12.  Notes Receivable

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

On April 21, 2009, we entered into a revolving VAT financing facility agreement for an available amount of €9.0 million ($13.2 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) with the same solar project entity with whom we entered into the credit facility agreement on April 8, 2009. The VAT facility agreement pre-finances the amounts of German value added tax (VAT) and any other tax obligations of similar nature during the construction phase of the photovoltaic power generation facility. Borrowings under this facility are short- term in nature, since the facility is repaid when VAT amounts are reimbursed by the government. The VAT facility agreement bears interest at the rate of Euribor plus 1.2% and matures on December 31, 2010. As of September 26, 2009 the balance on this credit facility was €5.8 million ($8.5 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). The outstanding amount of this credit facility is included within Prepaid expenses and other current assets on our condensed consolidated balance sheets.

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


Note 13. Debt

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

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

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

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

 
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Revolving Credit Facility

On September 4, 2009, we entered into a revolving credit facility pursuant to a Credit Agreement among First Solar, Inc., certain designated Borrowing Subsidiaries (consisting of First Solar Manufacturing GmbH, a German subsidiary, and other subsidiaries of our Company who may in the future be designated as borrowers pursuant to the Credit Agreement) and several lenders. JPMorgan Chase Bank, N.A. and Bank of America served as Joint-Lead Arrangers and Bookrunners, with JPMorgan also acting as Administrative Agent. The Credit Agreement provides First Solar, Inc. and the Borrowing Subsidiaries with a senior secured three-year revolving credit facility in an aggregate available amount of $300.0 million, a portion of which is available for letters of credit and swingline loans. Subject to certain conditions, we have the right to request an increase in the aggregate commitments under the Credit Facility up to $400.0 million. In connection with the Credit Agreement, we also entered into a guarantee and collateral agreement and foreign security agreements.

 Borrowings under the Credit Agreement currently bear interest at (i) LIBOR (adjusted for eurocurrency reserve requirements) plus a margin of 2.75% or (ii) a base rate as defined in the Credit Agreement plus a margin of 1.75%, depending on the type of borrowing requested by us. These margins are subject to adjustments depending on the Company’s consolidated leverage ratio and the credit rating of the facility provided by Moody’s Investors Service, Inc. and Standard and Poor’s Rating Services. 

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

In addition to paying interest on outstanding principal under the Credit Agreement, we are required to pay a commitment fee currently at the rate of 0.375% per annum to the lenders in respect of the average daily unutilized commitments thereunder. The commitment fee may also be adjusted due to changes in the consolidated leverage ratio.

We will also pay a letter of credit fee equal to the applicable margin for eurocurrency revolving loans on the face amount of each letter of credit and a fronting fee. Proceeds from the credit facility may be used for working capital and other general corporate purposes. 

The Credit Agreement contains various financial condition covenants which we must comply with, including with respect to a debt to EBITDA ratio, minimum EBITDA and minimum liquidity. Under the Credit Agreement we are also subject to customary non-financial covenants including limitations in secured indebtedness and limitations on dividends and other restricted payments. We were in compliance with these covenants through September 26, 2009.

Malaysian Facility Agreement

On May 6, 2008, in connection with the plant expansion at our Malaysian manufacturing center, First Solar Malaysia Sdn. Bhd. (FS Malaysia), our indirect wholly owned subsidiary, entered into an export financing facility agreement (Malaysian Facility Agreement) with IKB Deutsche Industriebank AG (IKB), as arranger, NATIXIS Zweigniederlassung Deutschland (NZD), as facility agent and original lender, AKA Ausfuhrkredit-Gesellschaft mbH (AKA), as original lender, and NATIXIS Labuan Branch (NLB), as security agent. The total available loan amount was €134.0 million ($197.0 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00). Pursuant to the Malaysia Facility Agreement, we began semi-annual repayments of the principal balances of these credit facilities during 2008. Amounts repaid under this credit facility cannot be re-borrowed. These credit facilities consisted of the following (in thousands):

Malaysian Borrowings
Denomination
 
Interest
   
Maturity
   
Outstanding at
September 26,
2009
       
Fixed-rate euro-denominated term loan
EUR
    4.54%       2016     $ 92,786        
Floating-rate euro-denominated term loan
EUR
 
Euribor plus 0.55%
      2016     $ 92,786        
Total
                    $ 185,572       (1 )

(1)  
€126.3 million outstanding at September 26, 2009 ($185.6 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00)

These credit facilities are intended to be used by FS Malaysia for the purpose of (1) partially financing the purchase of certain equipment to be used at our Malaysian manufacturing center and (2) financing fees to be paid to Euler-Hermes Kreditversicherungs-AG (Euler-Hermes), the German Export Credit Agency of Hamburg, Federal Republic of Germany, which guarantees 95% of FS Malaysia’s obligations related to the Malaysian Facility Agreement (Hermes Guaranty). In addition, FS Malaysia’s obligations related to the Malaysian Facility Agreement are guaranteed, on an unsecured basis, by First Solar, Inc., pursuant to a guaranty agreement.
 
Page | 22

FS Malaysia is obligated to pay commitment fees at an annual rate of 0.375% on the unused portions of the fixed rate credit facilities and at an annual rate of 0.350% on the unused portions of the floating rate credit facilities. In addition, FS Malaysia is obligated to pay certain underwriting, management and agency fees in connection with the credit facilities.

In connection with the Facility Agreement, First Solar, Inc. entered into a first demand guaranty agreement dated May 6, 2008 in favor of IKB, NZD, NLB and the other lenders under the Malaysian Facility Agreement. As noted above, FS Malaysia’s obligations related to the Malaysian Facility Agreement are guaranteed, on an unsecured basis, by First Solar, Inc. pursuant to this guaranty agreement.

In connection with the Malaysian Facility Agreement, all of FS Malaysia’s obligations related to the Malaysian Facility Agreement are secured by a first party, first legal charge over the equipment financed by the credit facilities and the other documents, contracts and agreements related to that equipment. Also in connection with the Malaysian Facility Agreement, any payment claims of First Solar, Inc. against FS Malaysia are subordinated to the claims of IKB, NZD, NLB and the other lenders under the Malaysian Facility Agreement.

The Malaysian Facility Agreement contains various financial covenants with which we must comply, such as debt to equity ratios, total leverage ratios, interest coverage ratios and debt service coverage ratios. We must calculate and subsequently submit these ratios related to the financial covenants for the first time at the end of fiscal 2009. The Malaysian Facility Agreement also contains various customary non-financial covenants with which FS Malaysia must comply, including submitting various financial reports and business forecasts to the lenders, maintaining adequate insurance, complying with applicable laws and regulations, and restrictions on FS Malaysia’s ability to sell or encumber assets or make loan guarantees to third parties. We were in compliance with these covenants through September 26, 2009.

Certain of our indebtedness bears interest at rates based on the Euro Interbank Offered Rate (Euribor). Euribor is the primary interbank lending rate within the Euro zone, with maturities ranging from one week to one year. A disruption of the credit environment could negatively impact interbank lending and therefore negatively impact the Euribor rate. An increase in the Euribor rate would increase our cost of borrowing.

State of Ohio Loans

During the years ended December 25, 2004 and December 31, 2005, we received the following loans from the Director of Development of the State of Ohio (in thousands):

Ohio Borrowings
 
Original Loan Amount
 
Denomination
 
Interest
   
Maturity
   
Outstanding at
September 26,
2009
 
Director of Development of the State of Ohio
  $ 15,000  
USD
    2.25%       2015     $ 10,280  
Director of Development of the State of Ohio
  $ 5,000  
USD
    0.25% — 3.25%       2009     $ 417  
Total
  $ 20,000                       $ 10,697  

Certain of our land, buildings and machinery and equipment has been pledged as collateral for these loans.

German Facility Agreement

On July 27, 2006, First Solar Manufacturing GmbH, a wholly owned indirect subsidiary of First Solar, Inc., entered into a credit facility agreement with a consortium of banks led by IKB Deutsche Industriebank AG under which First Solar Manufacturing GmbH could draw up to €102.0 million ($149.9 million at the balance sheet close rate on September 26, 2009 of $1.47/€1.00) to fund costs of constructing and starting up our German plant. First Solar Manufacturing GmbH repaid the entire outstanding principal amount of this credit facility and all accrued interest on June 30, 2009 and concurrently terminated this facility.


Page | 23
 
Note 14. Commitments and Contingencies

Financial guarantees

In the normal course of business, we occasionally enter into agreements with third parties under which we guarantee the performance of our subsidiaries related to certain service contracts, which may include services such as development, engineering, procurement of permits and equipment, construction management and monitoring and maintenance. These agreements meet the definition of a guarantee according to ASC 460, Guarantees. As of September 26, 2009, none of these guarantees were material to our financial position.

Loan guarantees

In connection with the Malaysian Facility Agreement, First Solar, Inc. entered into a first demand guaranty agreement dated May 6, 2008 in favor of IKB, NZD, NLB and the other lenders under the Malaysian Facility Agreement. FS Malaysia’s obligations related to the Malaysian Facility Agreement are guaranteed, on an unsecured basis, by First Solar Inc. pursuant to this guaranty agreement. See Note 13 to our condensed consolidated financial statements for additional information.

In connection with the revolving credit facility, we entered into a guarantee and collateral agreement and various foreign security agreements. Loans made to First Solar Manufacturing GmbH (a borrowing subsidiary under the credit facility) are (i) guaranteed by First Solar, Inc. pursuant to the guarantee and collateral agreement, (ii) guaranteed by certain of First Solar, Inc.’s direct and indirect subsidiaries organized under the laws of Germany, pursuant to a German guarantee agreement, (iii) secured by share pledge agreements, (iv) secured by a security interest in intercompany receivables held by First Solar Holdings GmbH, First Solar GmbH, and First Solar Manufacturing GmbH, pursuant to assignment agreements and (v) subject to a security trust agreement, which sets forth additional terms regarding the foregoing Germany security documents and arrangements. See Note 13 to our condensed consolidated financial statements for additional information.

Commercial commitments

During the three months ended September 26, 2009, we entered into two commercial commitments in the form of letters of credit related to our solar power systems and project development business in the amount of $5.5 million. We also increased two of our previously held bank guarantees for energy supply agreements by MYR 5.6 million ($1.6 million at the balance sheet close rate on September 26, 2009 of $0.29/MYR1.00), for a total commitment of MYR 11.8 million ($3.4 million at the balance sheet close rate on September 26, 2009 of $0.29/MYR1.00). As of September 26, 2009, we had the following additional four outstanding commercial commitments: MYR 3.0 million dated September 2008 for Malaysian custom and excise tax ($0.9 million at the balance sheet close rate on September 26, 2009 of $0.29/MYR1.00) and three letters of credit related to our solar power systems and project development business in the aggregate, amount of $4.2 million.

Product warranties

We offer warranties on our products and record an estimate of the associated liability based on the following: number of solar modules under warranty at customer locations, historical experience with warranty claims, monitoring of field installation sites, in-house testing of our solar modules and estimated per-module replacement cost.

Product warranty activity during the three and nine months ended September 26, 2009 and September 27, 2008 was as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
 
 
 
September 26,
2009
   
September 27,
2008
   
September 26,
2009
   
September 27,
2008
 
Product warranty liability, beginning of period
  $ 17,413     $ 10,865     $ 11,905     $ 7,276  
Accruals for new warranties issued (warranty expense)
    4,360       1,776       11,349       5,619  
Settlements
    (112 )     (45 )     (466 )     (53 )
Change in estimate of warranty liability
    (1,079 )     (2,738 )     (2,206 )     (2,984 )
Product warranty liability, end of period
  $ 20,582     $ 9,858     $ 20,582     $ 9,858  
Current portion of warranty liability
                  $ 7,667     $ 4,035  
Non-current portion of warranty liability
                  $ 12,915     $ 5,823  


Page | 24
Note 15. Share-Based Compensation

We measure share-based compensation cost at the grant date based on the fair value of the award and recognize this cost as an expense over the grant recipients’ requisite service periods, in accordance with ASC 718, Compensation-Stock Compensation. The share-based compensation expense that we recognized in our consolidated statements of operations for the three and nine months ended September 26, 2009 and September 27, 2008 was as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
 
 
 
September 26,
2009
   
September 27,
2008
   
September 26,
2009
   
September 27,
2008
 
Share-based compensation expense included in:
                       
Cost of sales
  $ 4,333     $ 3,776     $ 10,835     $ 9,146  
Research and development
    2,254       1,688       6,173       4,154  
Selling, general and administrative
    15,263       11,289       36,991       28,968  
Production start-up
    337       558       1,129       1,359  
Total share-based compensation expense
  $ 22,187     $ 17,311     $ 55,128     $ 43,627  

The increase in share-based compensation expense was primarily the result of new awards.

The following table presents our share-based compensation expense by type of award for the three and nine months ended September 26, 2009 and September 27, 2008 (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
 
 
 
September 26,
2009
   
September 27,
2008
   
September 26,
2009
   
September 27,
2008
 
Stock options
  $ 1,627     $ 3,819     $ 5,435     $ 13,554  
Restricted stock units
    21,024       13,564       51,265       30,009  
Unrestricted stock
    113       81       338       244  
Net amount absorbed into inventory
    (577 )     (153 )     (1,910 )     (180 )
Total share-based compensation expense
  $ 22,187     $ 17,311     $ 55,128