10-K 1 fslrdec1010k.htm 10-K PERIOD ENDED DECEMBER 31, 2010 WebFilings | EDGAR view
 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
(Mark one)
[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2010
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, $0.001 par value
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [x]   No [ ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [ ]   No [x]
 
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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]
 
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]
 
The aggregate market value of the registrant’s common stock, $0.001 par value per share, held by non-affiliates of the registrant on June 26, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $5,252,343,971 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant are not included in that amount, because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 24, 2011, 85,895,081 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2011, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
 

 

FIRST SOLAR, INC. AND SUBSIDIARIES
 
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
 
TABLE OF CONTENTS
 
 
 
 
 Page 
PART I
Item 1:
Business
 
 
Executive Officers of the Registrant
 
Item 1A:
Risk Factors
 
Item 1B:
Unresolved Staff Comments
 
Item 2:
Properties
 
Item 3:
Legal Proceedings
 
Item 4:
[Removed and Reserved]
 
 
 
 
 
PART II
Item 5:
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
 
Item 6:
Selected Financial Data
 
Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A:
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8:
Financial Statements and Supplementary Data
 
Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A:
Controls and Procedures
 
Item 9B:
Other Information
 
 
 
 
 
PART III
Item 10:
Directors, Executive Officers, and Corporate Governance
 
Item 11:
Executive Compensation
 
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13:
Certain Relationships and Related Transactions, and Director Independence
 
Item 14:
Principal Accountant Fees and Services
 
 
 
 
 
PART IV
Item 15:
Exhibits and Financial Statement Schedules
 
Signatures
 
Consolidated Financial Statements
 
Index to Exhibits
 
 
Throughout this Annual Report on Form 10-K, we refer to First Solar, Inc. and its consolidated subsidiaries as “First Solar,” the “Company,” “we,” “us,” and “our.” Our last three fiscal years ended on December 31, 2010, December 26, 2009, and December 27, 2008.
 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks, uncertainties, and assumptions that are difficult to predict. All statements in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross profit, operating expenses, products, projected costs, and capital expenditures; research and development programs; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue,” the negative or plural of these words, and other comparable terminology. Our forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Annual Report on Form 10-K are based upon information available to us as of the filing date of this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section entitled Item 1A: "Risk Factors,” and elsewhere in this Annual Report on Form 10-K. You should carefully consider the risks and uncertainties described under this section.
 
PART I
 
Item 1:  Business
 
Overview
 
We manufacture and sell solar modules with an advanced thin-film semiconductor technology, and we design, construct, and sell photovoltaic (PV) solar power systems.
 
In addressing a growing global demand for PV solar electricity, we target markets with varying approaches depending on the underlying economics, market requirements, and distribution channels. In subsidized feed-in tariff (FiT) markets, such as Germany, we have historically sold most of our solar modules to solar project developers, system integrators, and independent power producers. In other markets, such as the United States, the demand for solar electricity has been primarily driven by renewable portfolio standards requiring regulated utilities to supply a portion of their total electricity from renewable energy sources such as solar power. To meet the needs of these markets and enable balance-of-system (BoS) cost reductions, we have developed a fully integrated systems business that can provide turn-key utility-scale PV system solutions for system owners and low cost solar electricity to utility end-users. Our fully integrated systems business has enabled us to increase module throughput, drive cost reduction across the value chain, identify and break constraints to sustainable markets, and deliver the most compelling solutions to our customers and end-users. With our fully integrated systems business, we believe we are in a position to continue to expand our business in transition markets and, eventually, economically sustainable markets (in which subsidies or incentives are minimal), which are expected to develop in areas with abundant solar resources and sizable electricity demand. We are committed to continually lowering the cost of solar electricity, and in the long term, we plan on competing on an economic basis with conventional fossil-fuel-based peaking power generation.
 
In furtherance of our goal of delivering the lowest cost of solar electricity and achieving price parity with conventional fossil-fuel-based peak electricity generation, we are continually focused on reducing PV solar system costs in four primary areas: module manufacturing, BoS costs (consisting of the costs of the components of a solar power system other than the solar modules, such as inverters, mounting hardware, grid interconnection equipment, wiring and other devices, and installation labor costs), project development costs, and the cost of capital. First, with respect to our module manufacturing costs, our advanced technology has allowed us to reduce our average module manufacturing costs to the lowest in the world, based on publicly available information. In 2010, our total average manufacturing costs were $0.77 per watt, which we believe is significantly less than those of traditional crystalline silicon solar module manufacturers. By continuing to improve conversion efficiency and production line throughput, lower material costs, and drive volume scale to further decrease overhead costs, we believe that we can further reduce our manufacturing costs per watt and maintain our cost advantage over traditional crystalline silicon solar module manufacturers. Second, by continuing to improve conversion efficiency, leverage volume procurement around standardized hardware platforms, and accelerate installation time, we believe we can continue to make reductions in BoS costs, which represent over half of all of the costs associated with a typical utility-scale PV solar power system. Third, with respect to project development costs, we seek optimal site locations in an effort to minimize transmission and permitting costs and to accelerate lead time to

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electricity generation. Finally, we believe that continuing to strengthen our financial position, including our balance sheet and credit profile, together with increasing our solar power system operating experience, will enable us to continue to lower the cost of capital associated with our solar power systems, thereby further enhancing the economic viability of our projects and lowering the cost of electricity generated by solar power systems that incorporate our modules and technology.
 
We are one of the world's largest PV solar module manufacturers and produced nearly 1.4 gigawatts (GW) of solar modules in 2010. We are the world's largest thin-film PV solar module manufacturer. We manufacture our solar modules on high-throughput production lines and perform all manufacturing steps ourselves in an automated, proprietary, and continuous process. Our solar modules employ a thin layer of semiconductor material to convert sunlight into electricity. Our manufacturing process eliminates the multiple supply chain operators and expensive and time consuming batch processing steps that are used to produce a crystalline silicon solar module. Currently, we manufacture our solar modules at our Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia manufacturing facilities (with additional manufacturing facilities under construction or planned for construction in Kulim, Malaysia, Frankfurt/Oder, Germany, Blanquefort, France, Vietnam, and the United States), and we conduct our research and development activities primarily at our Perrysburg, Ohio manufacturing facility.
 
Our fully integrated solar power systems business includes (i) project development, (ii) engineering, procurement, and construction (EPC) services, (iii) operating and maintenance (O&M) services, and (iv) project finance expertise, all as described in more detail below.
 
•    
Our project development group obtains land and land rights for the development of solar power plants incorporating our modules, negotiates long-term power purchase agreements (PPA) with potential purchasers of the electricity to be generated by those plants, manages the interconnection and transmission process, negotiates agreements to interconnect the plant to the electric grid, and obtains the permits which are required prior to the construction of the plant, including applicable environmental and land use permits. Our project development portfolio and capabilities have grown significantly primarily as a result of our acquisition of the project development business of OptiSolar Inc. in April 2009, our acquisition of certain assets from Edison Mission Group’s utility-scale solar project development pipeline in January 2010, and our acquisition of NextLight Renewable Power, LLC in July 2010. We sell developed projects or projects under development to system operators who wish to own generating facilities, such as utilities, or to investors who are looking for long-term investment vehicles that are expected to generate consistent returns.
 
•    
We provide EPC services to projects developed by our project development business, projects developed by independent solar power project developers, and directly to system owners such as utilities. EPC services include engineering design and related services, advanced development of grid integration solutions, and construction contracting and management. The procurement component of our EPC services includes deployment of our modules as well as BoS components that we procure from third parties. 
 
•    
For solar power plants which we have developed and built, we may provide ongoing O&M services to the system owner under long-term service agreements. These O&M services may include overseeing the day-to-day operation of the system, safety and security, maximizing energy production, and management of reliability, site services, power purchase agreement and other contractual compliance, environmental and permit compliance, grid compliance, regulatory requirements, recordkeeping, forecasting, warranty, preventative and scheduled maintenance, and spare parts inventory and may also include certain additional guarantees relating to the project.
 
•    
Our project finance group is primarily responsible for negotiating and executing the sale of utility-scale power plant systems incorporating our modules which allows us to optimize the value of our project development portfolio. This group is experienced in structuring non-recourse project debt financing in the bank loan market and institutional debt capital markets and raising project equity capital from tax oriented and strategic industry equity investors.
 
We believe that combining our reliable, low cost module manufacturing capability coupled with our systems business enables us to more rapidly reduce the price of solar electricity, accelerate the adoption of our technology in large-scale systems, identify and break constraints to the successful migration to sustainable solar markets, and further our mission to create enduring value by enabling a world powered by clean, affordable solar electricity.
 
Segment Information
 
         We operate our business in two segments. Our components segment is our principal business and involves the design, manufacture, and sale of solar modules which convert sunlight into electricity. Customers of our components segment include project developers, system integrators, and operators of renewable energy projects.
 

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Our other segment is our fully integrated systems business, through which we provide a complete PV solar power system, which includes project development, EPC services, O&M services, when applicable, and project finance, when required. Our systems segment sells solar power systems, all of which use our solar modules, directly to investor owned utilities, independent power developers and producers, commercial and industrial companies, and other system owners who purchase completed solar power plants, EPC services, and/or O&M services from us.
 
Our Chief Operating Decision Maker (CODM), consisting of our senior executive staff, views the sale of solar modules from the components segment as the core driver of our profitability, return on net assets, and cash throughput; and as a result, we view our systems segment as an enabler to drive module throughput. Our EPC business is intended to enable sales throughput by developing state of the art construction techniques and process management to reduce the installed cost of our PV systems and, accordingly, this business is not intended to generate a standalone construction profit margin. Therefore, we operate our systems segment with the objective to achieve break-even results before income taxes. In our operating segment financial disclosures, we include the sale of our solar modules manufactured by our components segment and installed in projects sold by our systems segment in “net sales” of our components business. See Note 23. "Segment and Geographical Information," to our consolidated financial statements included in this Annual Report on Form 10-K.
 
Components Business
 
Our components segment, which is our principal business, involves the design, manufacture, and sale of solar modules which convert sunlight into electricity.
 
 Solar Modules
 
Each solar module is a glass laminate approximately 2ft x 4ft (60cm x 120cm) in size that encapsulates a cadmium telluride thin-film semiconductor. Our solar modules had an average rated power of approximately 76 watts, 75 watts, and 73 watts for 2010, 2009, and 2008, respectively. Our thin-film technology also has relatively high energy performance in low light and high temperature environments compared with traditional crystalline silicon solar modules. Our semiconductor structure is a single-junction polycrystalline thin-film that uses cadmium telluride as the absorption layer and cadmium sulfide as the window layer. Cadmium telluride has absorption properties that are highly matched to the solar spectrum and can deliver competitive conversion efficiencies using only about 1-2% of the semiconductor material used by traditional crystalline silicon solar modules.
 
 Manufacturing Process
 
We have integrated our manufacturing processes into a continuous production line with the following three stages: the “deposition” stage, the “cell definition” stage, and the “assembly and test” stage. In the deposition stage, panels of treated glass are robotically loaded onto the production line where they are cleaned, heated, and coated with a layer of cadmium sulfide followed by a layer of cadmium telluride using our proprietary vapor transport deposition technology, after which the semiconductor-coated plates are cooled rapidly to increase strength. In our cell definition stage, we use high speed lasers to transform the large single semiconductor coating on the glass plate into a series of interconnected cells that deliver the desired current and voltage output. Our proprietary laser scribing technology is capable of accomplishing accurate and complex scribes at high speeds. Finally, in the assembly and test stage, we apply busbars, inter-laminate material, and a rear glass cover sheet that is laminated to encapsulate the semiconductor. A junction box and termination wires are then applied to complete the assembly. Each solar module is then tested for current leakage and measured on a solar simulator. The final assembly stage is the only stage in our production line that requires manual processing.
 
Our manufacturing facilities in Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia have each received an ISO 9001 quality system certification, an ISO 14001:2004 environmental system certification, and the Occupational Health and Safety Standards (OHSAS) 18001 certification, an international occupational health and safety management system specification. We anticipate that our additional manufacturing facilities, under construction or planned for construction in Kulim, Malaysia, Frankfurt/Oder, Germany, Blanquefort, France, Vietnam, and the United States will also obtain these certifications within 24 months of production start-up.
 
Research, Development, and Engineering
 
We continue to devote a substantial amount of resources to research and development with the primary objective of lowering the cost of electricity generated by PV systems using our solar modules. Within our components business, we focus our research and development activities on, among other areas, continuing to increase the conversion efficiency of our solar modules and improving manufacturing efficiencies, including volume ramp, throughput improvement, and material cost reduction. We believe the most promising ways of increasing the conversion efficiency of our solar modules include maximizing the number of photons

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that reach the absorption layer of the semiconductor material to facilitate conversion into electrons, maximizing the number of electrons that reach the surface of the semiconductor and minimizing the electrical losses between the semiconductor layer and the back metal conductor.
 
In the course of our research and development activities, we continuously explore and research new technologies in our efforts to sustain competitive differentiation in our modules. We typically qualify process and product improvements for full production at our Ohio plant and then use our “Copy Smart” process to propagate them to our other production lines. We believe that this systematic approach to research and development will provide continuous improvements and ensure uniform adoption across our production lines. In addition, our production lines are replicas of each other using our “Copy Smart” process and, as a result, a process or production improvement on one line can be rapidly deployed to other production lines.
 
         Customers
           
With respect to our components business, during 2010, we sold most of our solar modules to solar project developers, system integrators, and operators headquartered in Germany, Italy, France, Spain, and the United States. Our customers typically develop, construct, own, and operate solar power plants or sell turn-key solar power plants to end-users that include owners of land, owners of agricultural buildings, owners of commercial warehouses, offices and industrial buildings, public agencies, municipal government authorities, utility companies, and financial investors who desire to own large-scale solar power plant projects. We continually seek to geographically diversify our customer base and are investing in market development, particularly in areas with abundant solar resources and sizable electricity demand, including other parts of Europe, China, India, Australia, and the Middle East. 
 
As of December 31, 2010, we had supply contracts for the sale of solar modules with fourteen principal customers (Supply Contracts) headquartered throughout the European Union. These contracts account for a significant portion of our planned module production over the period from 2011 through 2012 and, therefore, will significantly affect our overall financial performance. In the past we have amended pricing and other terms in our Supply Contracts on a prospective basis in order to remain competitive, as described below, and we may decide in the future to further amend such contracts in order to address the highly competitive environment for solar modules. In addition, we enter into module sales agreements or standard purchase orders with customers for specific projects.
 
During 2009, we amended our Supply Contracts with certain of our customers to implement a program which provided a price rebate to these customers for solar modules purchased from us. The intent of this program was to enable our customers to successfully compete in our core German market and to adjust, for eligible customers, the sales price (which was documented in framework agreements entered into several years ago) in light of market conditions. The rebate program is offered for a defined period, during which customers may apply and claim such rebate. The most recent rebate offering, for all solar modules sold through November 30, 2010, will terminate on February 28, 2011. Beginning March 1, 2011, we will offer customers a slightly modified rebate program for solar modules sold on or after December 1, 2010, including applicability to certain European geographic areas in addition to Germany. The rebate amounts continue to be established so as to enable the sell-through of our products at competitive prices. The amount of rebate earned during a fiscal quarter is based on (i) the volume of solar modules shipped to a customer (measured in watts), (ii) the volume of solar modules registered for eligible projects (measured in watts), provided that those solar modules were invoiced by the buyer to an end-user, and (iii) the rebate rate. The rebate program applies a specified rebate rate to solar modules sold for solar power projects in certain geographic areas. Customers need to meet certain requirements in order to be eligible for and benefit from this program. As of December 31, 2010, we have experienced approximately 81% participation in this program by eligible customers.
 
During 2010, the principal customers of our components business were EDF EN Development, Juwi Solar GmbH, and Phoenix Solar AG. During 2010, each of these three customers individually accounted for between 10% and 20% of our components segment’s net sales. All of our other customers individually accounted for less than 10% of our net sales during 2010. The loss of any of our major customers could have an adverse effect on our business. As we expand our manufacturing capacity, we are seeking to develop additional customer relationships in other markets and regions, which would reduce our customer and geographic concentration and dependence.
 
While our Supply Contracts have certain firm purchase commitments, these contracts are subject to amendments made by us or requested by our customers, such as the above mentioned amendments entered into since 2009. These amendments decreased the expected revenue under our Supply Contracts during 2009 and 2010. In addition, our Supply Contracts are substantially denominated in euros and, therefore, are subject to exchange rate fluctuations between the euro and U.S. dollar.
 
As of December 31, 2010, the Supply Contracts in the aggregate allowed for approximately $2.4 billion (€2.1 billion denominated in euro at an assumed exchange rate of $1.15/€1.00) in sales from 2011 to 2012. As of December 26, 2009, the Supply

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Contracts in the aggregate allowed for approximately $4.0 billion (€3.3 billion denominated in euro at an assumed exchange rate of $1.15/€1.00 and $0.2 billion denominated in USD) in sales from 2010 to 2013. The above-referenced dollar amounts relating to the Supply Contracts decreased from 2009 to 2010, primarily due to revenue recognized for contracted volumes sold in 2010, module pricing adjustments, the impact of the rebate program implemented in 2009, as described above, pre-set price reductions under the terms of the Supply Contracts, and the termination of a five-year agreement through 2013 with a solar power system project developer and system integrator in the United States, which was a related party. 
 
We anticipate that approximately 36% of the aggregate contracted revenue under the Supply Contracts as of December 31, 2010 will not be fulfilled in 2011 because it is associated with deliveries to be made in 2012. We believe that the aggregate dollar amount associated with the Supply Contracts at any particular date is not necessarily a meaningful indicator of future revenue for any particular period because the fulfillment of such amount is subject to a variety of factors, including the factors described above.
 
Competition
 
The renewable energy, solar energy, and solar module sectors are highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete within the larger electric power industry. We face continued competition, which may result in price reductions, reduced margins, or loss of market share. With respect to our components business, we believe that our main sources of competition are crystalline silicon solar module manufacturers, silicon and non-silicon based thin-film module manufacturers, and companies developing solar thermal and concentrated PV technologies. Among PV module and cell manufacturers, the principal methods of competition are price per watt, production capacity, conversion efficiency, reliability, warranty terms, and finance ability. At December 31, 2010, the global PV industry consisted of more than 150 manufacturers of solar cells and modules.
 
In addition, we expect to compete with future entrants to the PV industry that offer new technological solutions. We may also face competition from semiconductor manufacturers and semiconductor equipment manufacturers or their customers, several of which have already announced their intention to start production of PV cells, solar modules, or turn-key production lines. Some of these competitors may be part of larger corporations and have greater financial resources and greater brand name recognition than we do and, as a result, may be better positioned to adapt to changes in the industry or the economy as a whole.
 
We also face competition from companies that currently offer or are developing other renewable energy technologies (including wind, hydropower, geothermal, biomass, and tidal technologies) and other power generation sources that burn conventional fossil fuels.
 
Raw Materials
 
Our manufacturing process uses approximately 30 types of raw materials and components to construct a complete solar module. One critical raw material in our production process is cadmium telluride. Of the other raw materials and components, the following eight are also critical to our manufacturing process: front glass coated with transparent conductive oxide, cadmium sulfide, photo resist, laminate material, tempered back glass, cord plate/cord plate cap, lead wire, and solar connectors. Before we use these materials and components in our manufacturing process, a supplier must undergo a rigorous qualification process. We continually evaluate new suppliers and currently are qualifying several new suppliers and materials. A few of our critical materials or components are single sourced and most others are supplied by a limited number of suppliers. We are exploring a variety of tellurium mineral claims in various locations and expect to develop some of these tellurium resources in the future.
 
Collection and Recycling Program
 
Consistent with the environmental philosophy of extended producer responsibility, we have established the solar industry's first comprehensive, prefunded module collection and recycling program. The program is designed to maximize the recovery of valuable materials for use in new modules or other new products and minimize the environmental impacts associated with our modules at the end of their useful life. Approximately 90% of each collected First Solar module is recycled into materials for use in new products, including new solar modules. End-users can request collection and recycling of their solar modules by us at any time at no cost. We pre-fund the estimated collection and recycling cost at the time of sale, assuming for this purpose a minimum service life of approximately 25 years for our solar modules. In addition to achieving substantial environmental benefits, our solar module collection and recycling program may provide us the opportunity to resell or redistribute working modules or recover certain raw materials and components for reuse in our manufacturing process. We currently have recycling facilities operating at each manufacturing facility (for manufacturing scrap, warranty returns, and modules collected at the end of their useful life) that produce glass suitable for use in the production of new glass products and unrefined semiconductor materials that will be further processed by a third party supplier and then used to produce semiconductor materials for use in our solar modules.

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To ensure that the pre-funded amounts are available regardless of our financial status in the future, a trust structure has been established; funds are put into custodial accounts in the name of a trustee. Only the trustee can distribute funds from the custodial accounts and these funds cannot be accessed for any purpose other than for administering module collection and recycling, either by us or a third party executing the collection and recycling services. To provide further assurance that sufficient funds will be available, our module collection and recycling program, including the financing arrangement, is audited periodically by an independent third party auditor.
 
 Solar Module Warranty
 
We provide a limited warranty against defects in materials and workmanship under normal use and service conditions for five years following delivery to the owners of our solar modules. We also warrant to the owners of our solar modules that solar modules installed in accordance with agreed-upon specifications will produce at least 90% of their power output rating during the first 10 years following their installation and at least 80% of their power output rating during the following 15 years. In resolving claims under both the defects and power output warranties, we have the option of either repairing or replacing the covered solar module or, under the power output warranty, providing additional solar modules to remedy the power shortfall. Our warranties are automatically transferred from the original purchasers of our solar modules to subsequent purchasers. As of December 31, 2010, our components business' accrued warranty liability was $26.5 million, of which $9.8 million was classified as current and $16.7 million was classified as noncurrent. As of December 26, 2009, our components business' accrued warranty liability was $21.9 million, of which $7.6 million was classified as current and $14.4 million was classified as noncurrent.
 
Systems Business
 
Through our fully integrated systems business, we provide a complete solar power system solution using our solar modules, which may include project development, EPC services, O&M services, when applicable, and project finance, when required.
 
Our systems business has grown over the past several years through a combination of business acquisitions and organic growth. On November 30, 2007, we completed the acquisition of Turner Renewable Energy, LLC, a privately held company which provided EPC services for commercial solar power projects in the United States. On April 3, 2009, we completed the acquisition of the project development business of OptiSolar Inc., which included a multi-gigawatt project pipeline. In January 2010, we completed the acquisition of certain assets from Edison Mission Group's solar project development pipeline consisting of utility-scale solar projects located primarily on private land in California and the southwestern United States. In July 2010, we completed the acquisition of NextLight Renewable Power, LLC, a leading developer of utility-scale solar projects in the southwestern United States. This transaction expanded our pipeline of solar power projects in the southwestern United States and supports our expansion in the U.S. utility-scale power market.
 
Project Development
 
Our systems business is dependent upon successful completion of project development activities including: site selection and acquisition, obtaining in a timely manner the requisite interconnection and transmission studies, obtaining environmental and land use permits, maintaining effective site control, and entering into a power purchase agreement with an off-taker of the power to be generated by the project. These activities culminate in receiving the right to construct and operate a solar power system. Power purchase agreements define the price and terms the utility customer will pay for power produced from a project. Entering into a power purchase agreement generally provides the underlying economics needed to advance the construction, finance, and eventual sale of the project to the long-term site owner and power producer subject to obtaining all necessary permits. Depending primarily on the location and other site attributes, the development cycle can range from one to five years or longer in some circumstances. We may be required to spend significant sums for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. If there is a delay in obtaining any required regulatory approvals, we may be forced to incur additional costs and/or the right of the off-taker under the power purchase agreement to terminate may be triggered.
 
Our project development activities are currently focused on markets in North America, Europe, and Asia.
 
In North America, we have as of February 24, 2011, a nearly 2.4 GW AC contracted pipeline of projects that we expect to develop. We are also developing other projects in North America that do not yet have power purchase agreements.  In 2010, we sold and constructed 138 MW AC in projects in North America.  See Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Operations Overview-Net Sales-Systems Business,” for a listing of these projects.
 
In Europe, we are engaged in project development activities with respect to certain projects in France and Italy and we are

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actively evaluating additional project opportunities in Europe.
 
In Asia, our project development activities include our initiatives in China. In 2009, we entered into a memorandum of understanding and a cooperation framework agreement with the Ordos, China City Government outlining a long-term strategic relationship between the parties pursuant to which we would, through an appropriate business model, develop and construct in phases a 2 GW PV power plant located within the Ordos New Energy Industry Demonstration Zone in China.  In January 2011, we entered into a memorandum of understanding with China Guangdong Nuclear Solar Energy Development Co., Ltd. to collaborate on the development of the 30 MW Ordos phase one project. These memoranda of understanding set forth the agreements in principle of the parties concerning the Ordos project and related activities and are subject to the negotiation and execution of definitive agreements among the parties. We plan to continue to work with the Chinese Government to establish the project economics.
 
Customers
 
With respect to our systems business, our customers consist of investor owned utilities, independent power developers and producers, commercial and industrial companies, and other system owners who purchase completed solar power plants, EPC services, and/or O&M services from us. During 2010, the majority of our systems business sales were generated in North America.
 
During 2010, principal customers of our systems business were Enbridge, Inc., Sempra Energy, and Southern Company. During 2010, each of these three customers individually accounted for between 10% and 51% of our systems segment’s net sales. All of our other customers individually accounted for less than 10% of our net sales during 2010.
 
Competition
 
With respect to our systems business, we face competition from other providers of renewable energy solutions, including developers of PV, solar thermal and concentrated solar power systems, and developers of other forms of renewable energy projects, including wind, hydropower, geothermal, biomass, and tidal projects. To the extent other solar module manufacturers become more vertically integrated, we expect to face increased competition from such companies as well. We also face competition from other EPC companies and joint ventures between EPC companies and solar companies.
 
EPC Warranty
 
In addition to our solar module warranty described above, for solar power plants built by our EPC team, we typically provide a limited warranty against defects in workmanship, engineering design, and installation services under normal use and service conditions for a period of one year following the substantial completion of a solar power plant or an energized section of a solar power plant. In resolving claims under both the workmanship and design warranties, we have the option of either remedying the defect to the warranted level through repair, refurbishment, or replacement. As of December 31, 2010 and December 26, 2009, our systems business' accrued warranty liability was $1.4 million and $0.7 million, respectively, all of which was classified as current.
 
Support Programs
 
Support programs for PV solar electricity generation, depending on the jurisdiction, include feed-in tariffs (FiTs), quotas (including renewable portfolio standards and tendering systems), and net metering programs. In addition to these, financial incentives for renewables include tax incentives, grants, loans, rebates, and production incentives.
 
Under a basic FiT program, producers of renewable energy are paid a set rate for their electricity, usually differentiated according to the technology used and size of the installation. For PV solar, the rate has historically been set above above market rates and is fixed for a period of up to 25 years. In most countries with FiTs, grid operators are obliged to provide priority and guaranteed access to the grid for renewable energy installations. The additional costs of these schemes are passed through to the electricity consumers by way of a premium on the kilowatt hour (kWh) end-user price. These FiT subsidies have been critical for the development of the solar industry because they provided the demand visibility required for module manufacturers and other participants in the solar value chain to reduce costs and drive scale. Historically, the majority of our module sales have been for grid-connected ground or commercial roof mounted solar power systems in Germany and other European Union countries with FiT subsidies.
 
Whereas FiT laws set the price and let the market determine capacity and generation, quota systems work in reverse. In general, governments mandate a minimum share of capacity or (grid connected) generation of electricity to come from renewable energy sources. This share often increases over time, with a specific final target and end-date. The mandate can be placed on producers,

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distributors, or consumers.
 
There are two main types of quota systems used: obligation/certificate and tendering systems. A renewable portfolio standard (RPS) is in the former category. Under an RPS, regulated utilities are required to procure a specified percentage of their total electricity sales to end-user customers from eligible renewable resources, such as solar generating facilities, by a specified date. Some programs further require that a specified portion of the total percentage of renewable energy must come from solar generating facilities. The majority of states in the U.S. have enacted legislation adopting RPS mechanisms. RPS legislation and implementing regulations vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state's RPS mandate, the definition of eligible renewable energy resources, and the extent to which renewable energy credits (paper certificates representing the generation of renewable energy) qualify for RPS compliance. Currently, there is no federal RPS mandate. California previously enacted RPS legislation requiring 20% renewable energy by 2010. Although recent legislation to increase California's RPS mandate to 33% by 2020 has not become law, the state's agencies have been directed by executive order to plan for and adopt regulations requiring 33% renewable energy by 2020. Measured in terms of the volume of renewable electricity required to meet its RPS mandate, California's RPS program is the most significant in the U.S., and the California market for renewable energy dominates the western U.S. region.
 
Net energy metering programs enable end-users to install renewable systems and to offset their retail energy consumption with production from on-site facilities and, in some cases, to sell excess solar electricity to their retail electricity provider. Because the bundled cost of retail electricity usually exceeds the cost of unbundled electricity, net metering programs provide an incentive to the end-user, based on the savings for the electricity system. The policies governing net energy metering vary by state and utility. Some utilities pay the end-user in advance, while others credit the end-user's bill.
 
Tax incentive programs exist in the United States at both the federal and state level and can take the form of investment and production tax credits, accelerated depreciation and sales and property tax exemptions. At the federal level, investment tax credits for business and residential solar systems have gone through several cycles of enactment and expiration since the 1980's. In October 2008, the United States Congress extended the 30% federal investment tax credit (ITC) for both residential and commercial solar installations for eight years, through December 31, 2016. The ITC is a primary economic driver of solar installations in the United States. Its extension through 2016 has contributed to greater medium term demand visibility in the U.S.; however, its expiration at the end of 2016 (unless extended) underscores the need for the levelized cost of electricity from solar systems to continue to decline toward grid parity. In February 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law. In addition to adopting certain fiscal stimulus measures that could benefit on-grid solar electricity applications, ARRA created a new program, through the Department of the Treasury, which provides cash grants equal to 30% of the cost of the system for solar installations that are placed into service during 2009 and 2010 and for certain solar installations for which construction begins prior to December 31, 2010. This cash grant is available in lieu of receiving the 30% federal investment tax credit. The intent of this program was to ensure that investors who had historically supported the renewable energy programs would not be constrained from investing in these transactions by tax losses they may have suffered during the recent credit crisis. Other measures adopted by ARRA that could benefit on-grid solar electricity generation include the following: (i) a Department of Energy loan guarantee program for renewable energy projects, renewable energy manufacturing facilities and electric power transmission projects and (ii) a 50% bonus depreciation for solar installations placed in service during 2009. In December 2010, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Act) was signed into law. The 2010 Act extended the Department of the Treasury's cash grant program for one year, through December 31, 2011. In addition, the 2010 Act extended and expanded the ARRA bonus depreciation program, by providing for a 100% bonus depreciation for solar installations placed in service after September 8, 2010, and before January 1, 2012, and a 50% bonus depreciation for solar installations placed in service in 2012.
 
Rebate programs for solar installations in California and several other states have increased the quantity of solar energy from distributed PV systems (typically smaller non-utility scale PV systems co-located with residential or commercial rooftop end-users) and have contributed to demand for PV solar modules and systems. Regulations and policies relating to electricity pricing and interconnection also stimulate demand for distributed generation from PV systems. PV systems generate most of their electricity during mid-day and the early afternoon hours when the demand for and cost of electricity is highest. As a result, electricity generated by PV systems mainly competes with expensive peak hour electricity, rather than the lower average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate, would require PV systems to achieve lower prices in order to compete with the price of electricity.
 
In Europe, renewable energy targets, in conjunction with FiTs, have contributed to the growth in PV solar markets. Renewable energy targets prescribe how much energy consumption must come from renewable sources, while FiT policies are intended to support new supply development by providing investor certainty. A 2001 European Union (EU) directive for promoting renewable energy use in electricity generation (Directive 2001/77/EC) set varying national indicative targets for renewable energy production from individual member states. A 2009 EU directive on renewable energy (Directive 2009/28/EC), which replaced the 2001

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directive, sets varying targets for all EU member states in support of the directive's goal of a 20% share of energy from renewable sources in the EU by 2020, and requires national action plans that establish clear pathways for the development of renewable energy sources. The following is a description of FiT policies adopted in certain critical markets in support of renewable energy targets.
 
Currently, Germany, which accounted for approximately 46% of our 2010 net sales, is the most significant market for our modules, and changes to German FiTs are likely to affect the results of our operations. The German Renewable Energy Law, or the EEG, was last modified by the German government in 2010, with effect on July 1 and October 1, 2010. At that time, FiTs were significantly reduced from earlier levels: declining 13% for roof mounted applications, 12% for ground mounted applications, and 8% for applications on conversion land. An additional 3% cut in FiT for all PV types was introduced on October 1, 2010.
 
As of July 1, 2010, there was no longer a FiT for PV installations on agricultural land in Germany (subject to certain phase-out provisions). New land types (additional types of conversion land, industrial areas, and sites adjacent to highways/railways) were included in the EEG and benefit from FiTs under the new legislation. Also, the new legislation allows subsidies for ground mounted applications to continue after December 31, 2014.
 
The next adjustment of FiTs for all types of renewable energy is scheduled for January 1, 2012. However, the German government is expected to adopt a partial acceleration of the January 2012 FiT digression to mid-2011. Such a reduction in the FiT, including any potential further reductions, may contribute to a short-term pull-in of demand but could negatively affect long-term demand and price levels for PV products in Germany, which could have a material adverse effect on our business, financial condition, or results of operations.
 
In France, which accounted for approximately 14% of our 2010 net sales, and where we have announced plans to build a two-line manufacturing plant, the government suspended the applicable FiT legislation by decree for three months in December 2010. This moratorium does not apply to installations under 3 kW or larger projects for which PTFs (Proposition Technique et Financière) had been accepted before December 2, 2010 by the producer. However, these projects will have to be developed and connected within 18 months from the day of PTF acceptance in order to receive pricing under the FiT for the electricity generated by the plants.
 
A new decree introducing a new market support framework is expected to be adopted by the French government during the first quarter of 2011. It is currently expected that the market will be capped at 500 MW per year with 200 MW allocated to the free field application and the remainder to large commercial roof and residential applications. The French government is also considering a reduction of the FiT as well as the introduction of a tender system for large projects. As a result of the moratorium, we have put the construction of our Blanquefort, France manufacturing plant on hold until we have greater clarity about the future of the French market.
 
In Italy, which accounted for approximately 9% of our 2010 net sales, new FiT legislation (Conto Energia 3), has replaced the previous FiT legislation (Conto Energia 2). Conto Energia 3 has a threshold of 3 GW of installed ordinary PV plants, after which a 14 month transition period will begin during which the tariffs of Conto Energia 3 still apply. Conto Energia 3 expires at the latest on December 31, 2013, or earlier, if the threshold is reached. The new Conto Energia 3 legislation foresees an expected average cut to FiTs of 18% compared to the previous legislation.
 
In Spain, which accounted for approximately 4% of our 2010 net sales, the government published the latest FiT for PV systems in November 2010. The FiT levels will apply as of the second quarter of 2011. The FiT is based on a mechanism that requires a PV system to be registered in a national registry in order to obtain the FiT. Critically, under the legislation, only a certain number of megawatts (MW) of PV systems so registered are granted a FiT each quarter.
 
In addition, the Spanish government adopted a new decree in December 2010 that includes several measures designed to reduce the cost of the FiT. The decree limits an installation's operating hours that qualify for the FiT and applies retroactively to all PV installations. Electricity generated beyond the limit can only be sold at market rates. Eligible hours to receive the FiTs vary by region (among five zones) and by whether the PV system is mounted in a fixed position or is mounted on a tracker system that moves the solar module to follow the sun during the day. Under the FiT program, operating hour limits will be reviewed periodically, and yield improvements will be taken into consideration at that time.
 
In Ontario, Canada, a FiT program was introduced in September 2009 and replaced the Renewable Energy Standard Offer Program (RESOP) as the primary subsidy program for renewable energy projects. In order to participate in the Ontario FiT program, certain provisions relating to minimum required domestic content and agricultural land use restrictions for solar installations must be satisfied. The domestic content and land restriction rules do not apply to our solar projects governed by RESOP contracts. However, PV solar power systems incorporating our modules do not presently satisfy the domestic content requirement under the

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FiT program currently in effect.
 
In Australia, which accounted for less than 1% of our 2010 net sales, the solar industry is driven by several regulatory initiatives that support the installation of solar PV modules in both rooftop and free-field applications, including the federal government's Solar Flagship Program, state FiTs and the nationwide Renewable Energy Target Scheme which has set a renewable energy goal for Australia of 20% by 2020.
 
In China, governmental authorities have not adopted a FiT policy and currently award solar projects through either a project tendering process or bi-lateral negotiations. We did not have sales in China in 2010; however, we have entered into a memorandum of understanding with the Ordos, China City Government relating to the construction of a 2 GW PV power plant located within the Ordos New Energy Industry Demonstration Zone in China, and in January 2011, we entered into a memorandum of understanding with China Guangdong Nuclear Solar Energy Development Co., Ltd to collaborate on the development of the 30 MW Ordos phase one project. See Item 1: "Business - Segment Information -Systems Business - Project Development.”
 
In India, the National Solar Mission includes a goal of installing 22 GW of solar power generation capability by 2022. India also announced a FiT for the first phase of the National Solar Mission in 2010. During 2010, we had 10 MW of sales in India.
 
For more information about risks related to economic incentives, please see Item 1A: "Risk Factors — Reduced growth in or the reduction, elimination, or expiration of government subsidies, economic incentives, and other support for on-grid solar electricity applications, including potential mid-year FiT reductions in Germany and certain other core markets, could reduce demand and/or price levels for our solar modules, and limit our growth or lead to a reduction in our net sales, and adversely impact our operating results."
 
Intellectual Property
 
Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We rely primarily on a combination of patents, trademarks and trade secrets, as well as associate and third party confidentiality agreements, to safeguard our intellectual property. We regularly file patent applications to protect inventions arising from our research and development, and are currently pursuing patent applications in the U.S. and worldwide. Our patent applications and any future patent applications might not result in a patent being issued with the scope of the claims we seek, or at all, and any patents we may receive may be challenged, invalidated, or declared unenforceable. In addition, we have registered and/or have applied to register, trademarks and service marks in the U.S. and a number of foreign countries for “First Solar” and “First Solar and Design.”
 
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among other things, trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of our PV manufacturing process, including our unique materials sourcing, involve proprietary know-how, technology, or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms, and procedures. We have taken security measures to protect these elements. All of our research and development personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our associates to assign to us all of the inventions, designs, and technologies they develop during the course of employment with us. We also require our customers and business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our modules, technology, or business plans.
 
We have not been subject to any material intellectual property claims.
 
Environmental, Health, and Safety Matters
 
Our operations include the use, handling, storage, transportation, generation, and disposal of hazardous materials and hazardous wastes. We are subject to various national, state, local, and international laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, occupational health and safety, and the cleanup of contaminated sites. Therefore, we could incur substantial costs, including cleanup costs, fines, and civil or criminal sanctions and costs arising from third party property damage or personal injury claims as a result of violations of, or liabilities under, environmental and occupational health and safety laws and regulations or non-compliance with environmental permits required at our facilities. We believe we are currently in substantial compliance with applicable environmental and occupational health and safety requirements and do not expect to incur material capital expenditures for environmental and occupational health and safety controls in the foreseeable future. However, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of unknown environmental conditions may require expenditures that could have a material adverse effect on our

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business, results of operations, or financial condition. See Item 1A: "Risk Factors - Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and profitability.”
 
Corporate History
 
In February 2006 we were incorporated as a Delaware corporation. Our common stock has been listed on The NASDAQ Global Select Market under the symbol “FSLR” since our initial public offering in November 2006. In October 2009, our common stock was added to the S&P 500 Index, making First Solar the first, and currently only, pure-play renewable energy company in the index. In July 2010, our board of directors approved a change in our fiscal year from a 52 or 53 week fiscal year to a calendar year. As a result, our 2010 fiscal year, which began on December 27, 2009, ended on December 31, 2010 instead of December 25, 2010. In addition, effective January 1, 2011, our fiscal quarters will also coincide with calendar quarters.
 
Associates
 
As of February 24, 2011, we had approximately 6,100 associates (our term for full and part-time employees), including approximately 4,500 in manufacturing. The remainder of our associates are in research and development, sales and marketing, and general and administrative positions, including associates who are engaged in or support our systems business. None of our associates are currently represented by labor unions or covered by a collective bargaining agreement. As we expand domestically and internationally, however, we may encounter either regional laws that mandate union representation or associates who desire union representation or a collective bargaining agreement. We believe that our relations with our associates are good.
 
Information About Geographic Areas
 
We have significant marketing, distribution, and manufacturing operations both within and outside the United States. Currently, we manufacture our solar modules at our Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia manufacturing facilities (with additional manufacturing facilities under construction or planned for construction in Kulim, Malaysia, Frankfurt/Oder, Germany, Blanquefort, France, Vietnam, and the United States. We have put the construction of our Blanquefort, France manufacturing plant on hold until we have greater clarity about the future of the French market. In 2010, 74% of our net sales were generated from customers headquartered in the European Union. We are in the process of expanding our operations, particularly with respect to our systems business, to numerous countries worldwide, including other European and Asian countries and Australia. As a result, we will be subject to the legal, tax, political, social and regulatory requirements, and economic conditions of many jurisdictions. The international nature of our operations subjects us to a number of risks, including fluctuations in exchange rates, adverse changes in foreign laws or regulatory requirements and tariffs, taxes, and other trade restrictions. See Item 1A: "Risk Factors — Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in foreign countries.” See Note 23. "Segment and Geographical Information," to our consolidated financial statements included in this Annual Report on Form 10-K for information about our net sales and long-lived assets by geographic region for the years ended December 31, 2010, December 26, 2009, and December 27, 2008. See also Item 7: "Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for other information about our operations and activities in various geographic regions.
 
Available Information
 
We maintain a website at http://www.firstsolar.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC. The information contained in or connected to our website is not incorporated by reference into this report. We use our website as one means of disclosing material non-public information and for complying with our disclosure obligations under the SEC’s Regulation FD. Such disclosures will typically be included within the Investor Relations section of our website (http://investor.firstsolar.com). Accordingly, investors should monitor such portions of our website in addition to following our press releases, SEC filings, and public conference calls and webcasts.
 
The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports and other information regarding issuers, such as First Solar, that file electronically with the SEC. The SEC’s Internet website is located at http://www.sec.gov.
 
Executive Officers of the Registrant
 
Our executive officers and their ages and positions as of February 25, 2011, were as follows:

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Name
 
Age
 
Position
Robert J. Gillette
 
50
 
Chief Executive Officer
Bruce Sohn
 
49
 
President, Operations
Jens Meyerhoff
 
46
 
President, Utility Systems Business Group
TK Kallenbach
 
51
 
President, Components Business Group
Mary Beth Gustafsson
 
51
 
Executive Vice President, General Counsel and Secretary
Carol Campbell
 
59
 
Executive Vice President, Human Resources
Maja Wessels
 
51
 
Executive Vice President, Global Public Affairs
James Zhu
 
49
 
Chief Accounting Officer and Interim Chief Financial Officer
David Eaglesham
 
49
 
Chief Technology Officer
 
Robert J. Gillette joined First Solar in October 2009 as Chief Executive Officer. Prior to joining First Solar, Mr. Gillette served as President and Chief Executive Officer of Honeywell Aerospace since January 2005. Honeywell Aerospace, headquartered in Phoenix, Arizona, is Honeywell International Inc.'s largest business group. In this role, Mr. Gillette led Honeywell Aerospace's three main businesses—Air Transport & Regional, Business & General Aviation, and Defense & Space—with more than 40,000 associates at nearly 100 worldwide manufacturing and service sites. Prior to this assignment, Mr. Gillette had served as President and Chief Executive Officer of Honeywell Transportation Systems since July 2001. Mr. Gillette holds a bachelor's of science degree in Finance from Indiana University.
 
Bruce Sohn joined First Solar as President in March 2007 and was named President, Operations in February 2011. Mr. Sohn served as a director of First Solar from July 2003 until June 2009. Prior to joining First Solar as President, Mr. Sohn worked at Intel Corporation for 24 years. He is a senior member of IEEE and a certified Jonah. Mr. Sohn has been a guest lecturer at several universities, including the Massachusetts Institute of Technology and Stanford University. Mr. Sohn holds a degree in Materials Science and Engineering from the Massachusetts Institute of Technology.
 
Jens Meyerhoff has served as President of First Solar's Utility Systems Business Group since July 2010. Mr. Meyerhoff was formerly First Solar's Chief Financial Officer from May 2006 through December 2010. Prior to joining First Solar, Mr. Meyerhoff was the Chief Financial Officer of Virage Logic Corporation, a provider of embedded memory intellectual property for the design of integrated circuits, from January 2006 to May 2006. Mr. Meyerhoff was employed by FormFactor, Inc., a manufacturer of advanced wafer probe cards, as Chief Operating Officer from April 2004 to July 2005, Senior Vice President of Operations from January 2003 to April 2004 and Chief Financial Officer from August 2000 to March 2005. Mr. Meyerhoff holds a German Wirtschaftsinformatiker degree, which is the equivalent of a Finance and Information Technology degree, from Daimler Benz’s Executive Training Program.
 
TK Kallenbach joined First Solar in December 2009 as Executive Vice President of Marketing and Product Management and was named President, Components Business Group in February 2011. Prior to joining First Solar, Mr. Kallenbach was a senior executive at Honeywell Aerospace where he led strategic planning, product marketing, product management, mergers and acquisitions and marketing communications. His organization created and drove Honeywell Aerospace strategy through product portfolio integration and product line management. Mr. Kallenbach began his career at Honeywell (formerly AlliedSignal) in 1979, where he held a variety of senior technical leadership positions, including Vice President of Engineering and Technology for Aerospace Electronics, Defense & Space Electronic Systems, and Propulsion Engines and Systems, and senior business leadership positions including Vice President of Business Aviation, Director of HTF7000 Propulsion System, and Director of Helicopter Engines. Mr. Kallenbach holds a B.S. in Mechanical & Aerospace Engineering and a Masters of Business Administration from Arizona State University.
 
Mary Beth Gustafsson joined First Solar in October 2008 as Vice President, General Counsel and was named Executive Vice President, General Counsel and Secretary in November 2009. Prior to joining First Solar, Ms. Gustafsson was the Senior Vice President, General Counsel and Secretary of Trane Inc. (formerly American Standard Companies Inc.) from January 2005 through June 2008. From June 2008 through September 2008, Ms. Gustafsson was Vice President and Deputy General Counsel of Ingersoll-Rand Ltd., following Ingersoll-Rand’s acquisition of Trane. From 2001 through 2005, Ms. Gustafsson held positions of increasing responsibility at American Standard Companies Inc., including Chief Corporate Counsel and General Counsel for the company’s global air conditioning business. Ms. Gustafsson holds a B.A. in English Literature from Boston University and a J.D. from The University of Michigan Law School.
 
Carol Campbell joined First Solar in March 2006 as Director of Human Resources and was named Vice President of Human Resources in March 2007. She became the Company’s Executive Vice President of Human Resources in November 2009. Prior

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to joining First Solar, she was the Regional Director of Human Resources for North America at the Dana Corporation, where she was responsible for all Dana plants in the United States, Canada, and Mexico. Ms. Campbell was with Dana for 20 years, progressing through levels of greater responsibility in the Legal and Human Resource Departments. Ms. Campbell holds a Professional Human Resources certification through the Society of Human Resources Management and has extensive experience successfully developing and running highly effective HR organizations in complex and rapidly changing environments. Ms. Campbell holds a B.A. in Business from Heidelberg College.
 
Maja Wessels joined First Solar in May 2008 as Vice President of Government Affairs for the Europe, Middle East and Africa region and was named Executive Vice President, Public Affairs in May 2009.  Prior to joining First Solar, Ms. Wessels served four years as senior vice president, Government Affairs at Honeywell for the EMEA region and three years as President, United Technologies International Operations for Europe. Ms Wessels chaired the American Electronics Industry Association Europe from 2006 to 2007, and prior to that she was president of the American Chamber of Commerce to the EU from 2003 to 2007. From 1997 to 2000 she was employed by Daimler Chrysler as vice president of Government Affairs in Europe. Ms Wessels holds a B.A. from Dartmouth College and a master's degree in international economics and European studies from the School of Advanced International Studies of Johns Hopkins University.
 
James Zhu serves as First Solar’s Chief Accounting Officer and Senior Vice President. He has also served as interim Chief Financial Officer since January 2011. Mr. Zhu joined the company as Vice President, Corporate Controller in June 2007. Prior to joining First Solar, Mr. Zhu served as Assistant Controller and then Vice President, Corporate Controller for Salesforce.com from May 2004 to May 2007. From July 1999 through April 2004, Mr. Zhu held positions of increasing responsibility at Chiron Corporation (acquired by Novartis International AG in April 2006), including Associate Director and Accounting Manager. Prior to joining Chiron Corporation, Mr. Zhu worked at KPMG, LLP. Mr. Zhu is a Certified Public Accountant and holds a B.A. in Economics from China and an M.B.A. in Accounting from Golden Gate University.
 
David Eaglesham joined First Solar in June 2006 as Vice President, Technology and became Chief Technology Officer in November 2009. Prior to joining First Solar, he was Director of Advanced Technologies at Applied Materials. He also previously worked as Chief Technologist at Lawrence Livermore and as Director of Electronic Device Research at Bell Labs. He was Materials Research Society President in 2005. Mr. Eaglesham has a PhD in Physics from the University of Bristol.
 
Item 1A:  Risk Factors
 
An investment in our stock involves a high degree of risk. You should carefully consider the following information, together with the other information in this Annual Report on Form 10-K, before buying shares of our stock. If any of the following risks or uncertainties occur, our business, financial condition, and results of operations could be materially and adversely affected and the trading price of our stock could decline.
 
Risks Related to Our Markets and Customers
 
 
If PV technology is not suitable for widespread adoption at economically attractive rates of return, or if sufficient demand for solar modules does not develop or takes longer to develop than we anticipate, our net sales and profit may flatten or decline and we may be unable to sustain profitability.
 
The solar energy market is at a relatively early stage of development, and the extent to which solar modules will be widely adopted is uncertain. If PV technology proves unsuitable for widespread adoption at economically attractive rates of return or if demand for solar modules fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient net sales to sustain profitability. In addition, demand for solar modules in our targeted markets — including Germany, Italy, Spain, France, the United States, Canada, India, China, and Australia — may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of PV technology and demand for solar modules, including the following:
 
•    
cost-effectiveness of the electricity generated by PV power systems compared to conventional energy sources and products, including conventional energy sources, such as natural gas and coal, and other non-solar renewable energy sources, such as wind;
 
•    
availability, substance, and magnitude of government subsidies, incentives, and renewable portfolio standards to accelerate the development of the solar energy industry;
 
•    
performance and reliability of PV systems and thin-film technology compared to conventional and other non-solar

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renewable energy sources and products;
 
•    
success of other renewable energy generation technologies, such as hydroelectric, tidal, wind, geothermal, solar thermal, concentrated PV, and biomass;
 
•    
fluctuations in economic and market conditions that affect the price of, and demand for, conventional and non-solar renewable energy sources, such as increases or decreases in the price of natural gas, coal, oil, and other fossil fuels; and
 
•    
fluctuations in capital expenditures by end-users of solar modules, which tend to decrease when the economy slows and when interest rates increase.
 
Reduced growth in or the reduction, elimination, or expiration of government subsidies, economic incentives, and other support for on-grid solar electricity applications, including potential 2011 mid-year feed-in-tariff reductions in Germany and certain other core markets, could reduce demand and/or price levels for our solar modules, and limit our growth or lead to a reduction in our net sales, and adversely impact our operating results.
 
We believe that the near-term growth of the market for on-grid applications, where solar energy is used to supplement the electricity a consumer purchases from the utility network, depends significantly on the availability and size of government subsidies and economic incentives. Federal, state, and local governmental bodies in many countries, most notably Germany, Italy, Spain, France, the United States, Canada, China, India, and Australia have provided subsidies in the form of FiT, rebates, tax incentives, and other incentives to end-users, distributors, systems integrators, and manufacturers of PV products. Many of these jurisdictions, including the majority of U.S. states and numerous European Union countries, have adopted renewable portfolio standards in which the government requires jurisdictions or regulated utilities to supply a portion of their total electricity from specified sources of renewable energy, such as solar, wind, and hydroelectric power. Many of these government incentives expire, phase out over time, require renewal by the applicable authority, or may be amended. In light of strong 2010 solar growth, the major European governments are currently seeking to balance subsidy burdens with their commitment to the EU directive's goal of a 20% share of energy from renewable sources in the EU by 2020. A summary of recent developments in the major government subsidy programs in our core markets appears under Item 1: "Business - Support Programs." We expect the FiT in Germany and certain other core markets to be reduced earlier than previously expected, and such reductions could reduce demand and/or price levels for our solar modules, lead to a reduction in our net sales, and adversely impact our operating results. 
 
Currently, Germany, which accounted for approximately 46% of our net sales in 2010, is the largest market for our modules, and thus recently proposed changes to German feed-in tariffs could significantly impact our results of operations. The German government is expected to adopt a partial acceleration of the January 2012 FiT digression to mid-2011. Such a reduction in the German FiT, including any potential further reductions, may contribute to a short-term pull-in of demand but could negatively affect long-term demand and price levels for PV products in Germany, which could have a material adverse effect on our business, financial condition, and/or results of operations.
 
In France, the government suspended the FiT legislation by decree for three months in December 2010. Although a new decree introducing a new market support framework is expected to be adopted by the government during the first quarter of 2011, we cannot be certain that such market support framework will be adopted at all or adopted at meaningful levels.  If the level of such new market support framework is not adequate to promote the development of the PV industry or PV projects in France, our ability to pursue an expansion strategy in France would be adversely affected. As a result of the moratorium, we have put the construction of our Blanquefort, France manufacturing plant on hold until we have greater clarity about the future of the French market.
 
In Italy and Spain, we cannot be certain that the level of FiTs will be adequate to promote the development of the PV industry or PV projects in these countries, in which case our ability to pursue an expansion strategy in these countries would be adversely affected.  These expansion strategies could be further adversely affected to the extent of any acceleration or imposition of FiT reductions, caps, or other limitations in these countries.
 
In the United States, California has been the state where the majority of solar installations and solar power module and system sales have taken place in recent years. The state of California’s RPS goal of 33% of electricity from renewable sources by 2020, currently in the form of an executive order from the Governor’s office, is the most significant RPS program in the United States in magnitude and is contributing to the expansion of the utility-scale solar systems market in that state. However, the continued effectiveness of this RPS program could be negatively impacted if the RPS goal is not passed by the California legislature and signed into law. See Item 1A: "Risk Factors — Our ability to pursue an expansion strategy in California beyond existing projects may be adversely affected if California is unable to achieve a 33% renewable mandate through law,” below.

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The American Recovery and Reinvestment Act of 2009 (ARRA) and the 2010 Tax Act provide for certain measures intended to benefit on-grid solar electricity generation and other renewable energy initiatives. The failure to further extend or enhance these programs may reduce tax equity availability (in the case of the grant expiration) which may adversely affect our ability to arrange financing for utility-scale projects and may otherwise adversely affect the attractiveness of the U.S. solar market.
 
In Ontario, Canada, a FiT program was introduced in September 2009 and replaced the Renewable Energy Standard Offer Program (RESOP) as the primary subsidy program for renewable energy projects. In order to participate in the Ontario FiT program, certain provisions relating to minimum required domestic content and agricultural land use restrictions for solar installations must be satisfied. The domestic content and land restriction rules do not apply to our solar projects governed by RESOP contracts. However, PV solar power systems incorporating our modules do not presently satisfy the domestic content requirement under the FiT program currently in effect, and thus projects incorporating our modules would not qualify for the Ontario FiT. In the event the Ontario domestic content and land use restriction rules are not sufficiently modified, our ability to participate in the Ontario FiT program for future projects beyond our existing RESOP projects will be substantially reduced and possibly completely eliminated, and thus our ability to pursue an expansion strategy in Ontario, Canada beyond our existing RESOP projects would be adversely affected. 
 
In Australia, the solar industry is driven by several regulatory initiatives that support the installation of solar PV modules in both rooftop and free field applications, including the federal government's Solar Flagship Program, state FiTs and the nationwide Renewable Energy Target Scheme, which has set a renewable energy goal for Australia of 20% by 2020.  If such programs or other initiatives are not successfully executed in addressing Australia's renewable energy goals, the size and attractiveness of Australia's solar market may be limited and we may be unable to sell modules or systems in Australia at an attractive price, limiting one of our anticipated growth markets.
 
In China, governmental authorities have not adopted a FiT policy and currently award solar projects through either a project tendering process or bi-lateral negotiations. While the solar industry generally anticipates that China will adopt a solar FiT, there is no guarantee this will occur in a timely manner or at all or that any FiT will be economically viable. Without a FiT, the size and attractiveness of China’s solar market may be limited, the viability of our proposed Ordos project may be negatively impacted and we may be otherwise unable to sell into China at an attractive price, limiting one of our anticipated growth markets.
 
In India, the National Solar Mission includes a goal of installing 22 GW of solar by 2022.  India has announced a FiT for the first phase of the National Solar Mission in 2010. There is no guarantee that India will maintain its current goal of 22 GW by 2022 or adopt the required policies to meet that goal, without which, the size and attractiveness of India’s solar market may be limited and we may be unable to sell modules or systems in India at an attractive price, limiting one of our anticipated growth markets.
 
Emerging subsidy programs may require an extended period of time to attain effectiveness because the applicable permitting and grid connection processes associated with these programs can be lengthy and administratively burdensome. In addition, if any of these statutes or regulations is found to be unconstitutional, or is reduced or discontinued for other reasons, sales prices and/or volumes of our solar modules in these countries could decline significantly, which could have a material adverse effect on our business, financial condition, and results of operations. Electric utility companies or generators of electricity from fossil fuels or other renewable energy sources could also lobby for a change in the relevant legislation in their markets to protect their revenue streams.
 
Reduced growth in or the reduction, elimination, or expiration of government subsidies and economic incentives for on-grid solar energy applications, especially those in our target markets, could limit our growth or cause our net sales to decline and materially and adversely affect our business, financial condition, and results of operations.
 
Our ability to pursue an expansion strategy in California beyond existing projects may be adversely affected if California is unable to achieve a 33% renewable mandate through law.
 
California required its investor-owned utilities (IOUs) to procure 20% of their electricity supplies through eligible renewable energy resources by 2010. In addition, California, through executive order has established a utility procurement goal of 33% renewable electricity by 2020. However, since the 33% procurement of renewable electricity by 2020 goal is currently not enforceable through law, it is conceivable that renewable energy procurement in California could peak at a level below 33% of the IOU’s electricity retail sales if the 33% renewable mandate is not signed into law. If the state legislature and Governor’s office are unable to adopt legislation establishing the 33% renewable energy mandate, the viability of the 33% RPS program would remain at risk. In addition, any weakening or delay of the 33% RPS program could contribute to, or be accompanied by, increased project execution risks, delay, or costs relating to California authorities, such as the California Independent System Operator.

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Under such a scenario, our ability to execute a long-term expansion plan to develop additional large-scale PV projects in California could be adversely affected.
 
An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for end-users to finance the cost of a PV system and could reduce the demand for our solar modules and/or lead to a reduction in the average selling price for PV modules.
 
Many of our customers and our systems business depend on debt and/or equity financing to fund the initial capital expenditure required to develop, build and purchase a PV system. As a result, an increase in interest rates or lending rates, or a reduction in the supply of project debt financing or tax equity investments, could reduce the number of solar projects that receive financing or otherwise make it difficult for our customers or our systems business to secure the financing necessary to develop, build, purchase or install a PV system on favorable terms, or at all, and thus lower demand for our solar modules which could limit our growth or reduce our net sales. In addition, we believe that a significant percentage of our end-users install PV systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates and/or lending rates could lower an investor's return on investment in a PV system, increase equity return requirements or make alternative investments more attractive relative to PV systems, and, in each case, could cause these end-users to seek alternative investments. As described above under Item 1: "Business — Support Programs,” the 30% grant in lieu of the federal investment tax credit under the ARRA is set to expire and unless extended, will not be available for solar installations that begin construction on or after January 1, 2012. If such program is not extended, total tax equity availability could be reduced which may adversely affect our ability to arrange financing for utility-scale projects and may adversely affect the attractiveness of the U.S. solar market.
 
We currently sell a substantial portion of our solar modules under Supply Contracts, and we allocate a significant amount of our production to satisfy our obligations under these contracts. These customers buy our modules with the expectation that they will be able to resell them in connection with the development of PV systems. As discussed above, many of these projects depend on the availability of debt and equity financing. A prolonged, material disruption to the supply of project finance could adversely affect our customers’ ability to perform under these agreements. In the event of default by one or more of these customers, we may be unable to sell these modules at the prices specified in our Supply Contracts, especially if demand for PV systems softens or supply of solar modules increases. Also, we may decide to lower our average selling price to certain customers in certain markets in response to changes in economic circumstances of our customers, their end markets, or the capital markets. See Item 1: "Business — Segment Information — Components Business — Customers,” for a description of previous pricing adjustments under our Supply Contracts.
 
We currently depend on a limited number of customers, with three customers accounting for a majority of our components business’ net sales last year. The loss of, or a significant reduction in orders from, any of these customers could significantly reduce our net sales and negatively impact our operating results.
 
We currently sell the majority of our solar modules to customers headquartered throughout the European Union. During 2010, our three largest customers for our components business each accounted for between 10% and 20% of our components business’ net sales. Our customer base within our components business is currently concentrated to a significant extent in Germany and, therefore, additional German FiT reductions could reduce demand and/or price levels for our modules sold to these customers. The loss of any of our large customers, their inability to perform under their contracts, or their default in payment could significantly reduce our net sales and adversely impact our operating results. Our customers may face significant challenges under current economic conditions, including lack of capital to finance solar projects and rising costs associated with leasing or otherwise acquiring land and rooftops for solar projects. We believe that we can mitigate this risk by re-allocating modules to other customers if the need arises, but we may be unable, in whole or in part, to mitigate the reduced demand for our modules. In the event that we determine that our planned production of solar modules exceeds the demand we anticipate, we may decide to reduce or halt production of solar modules in our manufacturing facilities. However, we may be unable to anticipate and respond to the oversupply of solar modules because we have limited visibility into our customers’ inventories.
 
Risks Related to Regulations
 
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of PV products, which may significantly reduce demand for our solar modules.
 
The market for electricity generation products is heavily influenced by foreign, federal, state, and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of PV products and investment in the research and

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development of PV technology. For example, without a mandated regulatory exception for PV systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. If these interconnection standby fees were applicable to PV systems, it is likely that they would increase the cost to our end-users of using PV systems which could make them less desirable, thereby harming our business, prospects, results of operations, and financial condition. In addition, electricity generated by PV systems mostly competes with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate for all times of the day, would require PV systems to achieve lower prices in order to compete with the price of electricity from other sources.
 
We anticipate that our solar modules and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering, and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar modules may result in significant additional expenses to us, our resellers, and their customers and, as a result, could cause a significant reduction in demand for our solar modules.
 
Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and profitability.
 
Our operations involve the use, handling, generation, processing, storage, transportation, and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local, and international levels. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, the cleanup of contaminated sites, and occupational health and safety. We have incurred and will continue to incur significant costs and capital expenditures in complying with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims, cleanup costs, or other costs. While we believe we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations, and financial condition.
 
In addition, our products contain cadmium telluride and cadmium sulfide. Elemental cadmium and certain of its compounds are regulated as hazardous material due to the adverse health effects that may arise from human exposure. Although the risks of exposure to cadmium telluride are not believed to be as serious as those relating to exposure to elemental cadmium, the chemical, physical, and toxicological properties of cadmium telluride have not been thoroughly investigated and reported. In our manufacturing operations, we maintain engineering controls to minimize our associates’ exposure to cadmium or cadmium compounds and require our associates who handle cadmium compounds to follow certain safety procedures, including the use of personal protective equipment such as respirators, chemical goggles, and protective clothing. In addition, we believe the risk of exposure to cadmium or cadmium compounds from our end-products is limited by the encapsulated nature of these materials in our products and the physical properties of cadmium compounds used in our products, and further minimized by the voluntary implementation in 2005 of our collection and recycling program for our solar modules. While we believe that these factors and procedures are sufficient to protect our associates, end-users, and the general public from adverse health effects that may arise from cadmium exposure, we cannot assure that human or environmental exposure to cadmium or cadmium compounds used in our products will not occur. Any such exposure could result in future third party claims against us, as well as damage to our reputation and heightened regulatory scrutiny of our products, which could limit or impair our ability to sell and distribute our products. The occurrence of future events such as these could have a material adverse effect on our business, financial condition, or results of operations.
 
The use of cadmium in various products is also coming under increasingly stringent governmental regulation. Future regulation in this area could impact the manufacture, sale, collection, and recycling of solar modules and could require us to make unforeseen environmental expenditures or limit our ability to sell and distribute our products. For example, European Union Directive 2002/95/EC on the Restriction of the Use of Hazardous Substances in electrical and electronic equipment (RoHS Directive), restricts the use of certain hazardous substances, including cadmium, in specified products. Other jurisdictions, such as China have adopted similar legislation or are considering doing so. Currently, PV solar modules are not subject to the RoHS Directive; however, the RoHS Directive allows for future amendments subjecting additional products to the requirements and the scope. Applicability and the products included in the Directive may also change. In December 2008, the European Commission issued its proposed revision of the RoHS Directive. This proposed revision did not include PV solar modules in the scope of RoHS. In November 2010, the European Parliament, European Commission and European Council agreed on a revised RoHS Directive under which all Electrical and Electronic Equipment (EEE) are included in the scope of the RoHS Directive unless specifically excluded or exempted from coverage. PV is explicitly excluded from the scope of RoHS (Article 2). The European Parliament formally adopted the agreement

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in November 2010 and the Council is expected to formally adopt the agreement in the first half of 2011. Nevertheless, if PV modules are included in the scope of RoHS without an exemption or exclusion, we would be required to redesign our solar modules to eliminate cadmium in order to continue to offer them for sale within the European Union, which would be impractical. In such event, the European Union market would be in effect closed to us, which would have a material adverse effect on our business, financial condition, and results of operations. In 2010, 74% of our total net sales were generated from module sales in the European Union.
 
Risks Related to our Operations, Manufacturing, and Technology
 
Our operating history to date may not serve as an adequate basis to judge our future prospects and results of operations.
 
Our historical operating results may not provide a meaningful basis for evaluating our business, financial performance, and prospects. While our net sales grew from $135.0 million in 2006 to nearly $2.6 billion in 2010, we may be unable to achieve similar growth, or grow at all, in future periods. Our ability to achieve similar growth in future periods is also affected by current economic conditions. Our past results occurred in an environment where, among other things, capital was generally more accessible to our customers to finance the cost of developing solar projects and economic incentives for solar power in certain core markets (such as the German FiT) were more favorable. Accordingly, you should not rely on our results of operations for any prior period as an indication of our future performance. See Item 1: "Business — Segment Information — Components Business — Customers,” for a description of previous pricing adjustments under our Supply Contracts.
 
We face intense competition from manufacturers of crystalline silicon solar modules, thin-film solar modules, and solar thermal and concentrated PV systems; if global supply exceeds global demand, it could lead to a reduction in the average selling price for PV modules, which could reduce our net sales and adversely affect our results of operations.
 
The solar energy and renewable energy industries are highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with the larger electric power industry. Within the global PV industry, we face competition from crystalline silicon solar module manufacturers, other thin-film solar module manufacturers and companies developing solar thermal and concentrated PV technologies. Existing or future solar manufacturers might be acquired by larger companies with significant capital resources, thereby intensifying competition with us.  In addition, the introduction of a low cost disruptive technology could adversely affect our ability to compete, which could reduce our net sales and adversely affect our results of operations.
 
Even if demand for solar modules continues to grow, the rapid expansion plans of many solar module manufacturers could create periods where supply exceeds demand. In addition, we believe a significant decrease in the cost of silicon feedstock would provide significant reductions in the manufacturing cost of crystalline silicon solar modules and lead to pricing pressure for solar modules and potentially the oversupply of solar modules.
 
During any such period, our competitors could decide to reduce their sales prices in response to competition, even below their manufacturing costs, in order to generate sales. As a result, we may be unable to sell our solar modules at attractive prices, or for a profit, during any period of excess supply of solar modules, which would reduce our net sales and adversely affect our results of operations. Also, we may decide to lower our average selling price to certain customers in certain markets in response to competition.
 
Thin-film technology has a short history, and our thin-film technology and solar modules and systems may perform below expectations; problems with product quality or performance may cause us to incur warranty expenses, damage our market reputation, and prevent us from maintaining or increasing our market share.
 
Researchers began developing thin-film semiconductor technology over 20 years ago, but were unable to integrate the technology into a solar module production line until several years ago. Our thin-film technology and solar modules may not have a sufficient operating history to confirm how our solar modules will perform over their estimated 25-year useful life. We perform a variety of quality and life tests under different conditions. However, if our thin-film technology and solar modules perform below expectations, we could lose customers and face substantial warranty expense.
 
Our solar modules are sold with a five-year materials and workmanship warranty for technical defects and a 25-year warranty against declines of more than 10% of their initial rated power in the first 10 years following their installation and 20% of initial rated power in the following 15 years, respectively. As a result, we bear the risk of extensive warranty claims long after we have sold our solar modules and recognized net sales. As of December 31, 2010, our accrued warranty liability was $27.9 million, of which, $11.2 million was classified as current and $16.7 million was classified as noncurrent.
 

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Although our power output warranty extends for 25 years, our oldest solar modules manufactured during the qualification of our pilot production line have only been in use since 2001. Because of the limited operating history of our solar modules, we have been required to make assumptions regarding the durability and reliability of our solar modules. Our assumptions could prove to be materially different from the actual performance of our solar modules, causing us to incur substantial expense to repair or replace defective solar modules in the future. For example, our glass-on-glass solar modules could break, delaminate, or experience power degradation in excess of expectations, and our manufacturing operations could be subject to process variations that could cause affected modules to underperform compared to our expectations. Any widespread product failures may damage our market reputation and cause our sales to decline and require us to repair or replace the defective modules, which could have a material adverse effect on our financial results.
 
In addition to our solar module warranty described above, for solar power plants built by our EPC team, we currently typically provide a limited EPC warranty against defects in workmanship, engineering design, and installation services under normal use and service conditions for a period of one year following the substantial completion of a solar power plant or an energized section of a solar power plant.  In resolving claims under both the workmanship and design warranties, we have the option of either remedying the defect to the warranted level through repair, refurbishment, or replacement. Any widespread failures of solar power plants built by us could damage our market reputation, cause our sales to decline, cause us to incur unexpected costs to remedy defects or otherwise negatively affect our results of operations. 
 
If our estimates regarding the future cost of collecting and recycling our solar modules are incorrect, we could be required to accrue additional expenses at and from the time we realize our estimates are incorrect and face a significant unplanned cash burden.
 
We pre-fund our estimated future obligation for collecting and recycling our solar modules based on the present value of the expected future cost of collecting and recycling the modules, which includes the cost of packaging the solar modules for transport, the cost of freight from the solar module’s installation site to a recycling center, the material, labor, and capital costs of the recycling process, and an estimated third party profit margin and return on risk for collection and recycling. We base our estimate on our experience collecting and recycling solar modules that do not pass our quality control tests and solar modules returned under our warranty, and on our expectations about future developments in recycling technologies and processes and economic conditions at the time the solar modules will be collected and recycled. If our estimates prove incorrect, we could be required to accrue additional expenses at and from the time we realize our estimates are incorrect and also face a significant unplanned cash burden at the time we realize our estimates are incorrect or end-users return their solar modules, which could harm our operating results. In addition, our end-users can return their solar modules at any time. As a result, we could be required to collect and recycle our solar modules earlier than we expect.
 
Our failure to further refine our technology and develop and introduce improved PV products could render our solar modules or systems uncompetitive and reduce our net sales, profitability, and/or market share.
 
We need to invest significant financial resources in research and development to continue to improve our module conversion efficiency, lower the levelized cost of electricity (LCOE) of our PV systems, and otherwise keep pace with technological advances in the solar energy industry. However, research and development activities are inherently uncertain, and we could encounter practical difficulties in commercializing our research results. We seek to continuously improve our products and processes, and the resulting changes carry potential risks in the form of delays, additional costs, or other unintended contingencies. In addition, our significant expenditures on research and development may not produce corresponding benefits. Other companies are developing a variety of competing PV technologies, including copper indium gallium diselenide and amorphous silicon, which could produce solar modules or systems that prove more cost-effective or have better performance than our solar modules or systems. In addition, other companies could potentially develop a highly reliable renewable energy system that mitigates the intermittent power production drawback of many renewable energy systems, or offers other value-added improvements from the perspective of utilities and other system owners, in which case such companies could compete with us even if the LCOE associated with such new system is higher than that of our systems. As a result, our solar modules or systems may be negatively differentiated or rendered obsolete by the technological advances of our competitors, which would reduce our net sales, profitability and/or market share.
 
In addition, we often forward price our products and services (including through our Supply Contracts and power purchase agreements) in anticipation of future cost reductions, and thus an inability to further refine our technology and execute our long-term manufacturing cost and LCOE reduction objectives could adversely affect our margins and operating results.
 
Our failure to protect our intellectual property rights may undermine our competitive position and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly.
 
Protection of our proprietary processes, methods, and other technology is critical to our business. Failure to protect and

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monitor the use of our existing intellectual property rights could result in the loss of valuable technologies. We rely primarily on patents, trademarks, trade secrets, copyrights, and contractual restrictions to protect our intellectual property. We regularly file patent applications to protect inventions arising from our research and development, and are currently pursuing such patent applications in the U.S. and worldwide. Our existing patents and future patents could be challenged, invalidated, circumvented, or rendered unenforceable. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not be sufficient to provide meaningful protection against competitors or against competitive technologies.
 
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation, and other trade secrets to develop and maintain our competitive position. Although we generally enter into confidentiality agreements with our associates and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets, and proprietary manufacturing expertise, methods, and compounds could have a material adverse effect on our business. In addition, effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in some foreign countries, especially any developing countries into which we may expand our operations. In some countries we have not applied for patent, trademark, or copyright protection.
 
Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Policing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. We cannot assure you that the outcome of such potential litigation will be in our favor. Such litigation may be costly and may divert management attention and other resources away from our business. An adverse determination in any such litigation may impair our intellectual property rights and may harm our business, prospects, and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties.
 
Some of our key raw materials and components are either single-sourced or sourced from a limited number of third party suppliers and their failure to perform could cause manufacturing delays and impair our ability to deliver solar modules to customers in the required quality and quantities and at a price that is profitable to us.
 
Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing cost. Some of our key raw materials and components are either single-sourced or sourced from a limited number of third party suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and impair our operations. In addition, some of our suppliers are small companies that may be unable to supply our increasing demand for raw materials and components as we continue to expand rapidly. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. A constraint on our production may cause us to be unable to meet our capacity ramp plan and/or our obligations under our customer contracts, which would have an adverse impact on our financial results.
 
A disruption in our supply chain for cadmium telluride, our semiconductor material, could interrupt or impair our ability to manufacture solar modules.
 
A key raw material we use in our production process is a cadmium telluride compound. Tellurium, one of the main components of cadmium telluride, is mainly produced as a by-product of copper refining and, therefore, its supply is largely dependent upon demand for copper. Our supply of cadmium telluride could be limited if any of our current suppliers or any of our future suppliers are unable to acquire an adequate supply of tellurium in a timely manner or at commercially reasonable prices. If our competitors begin to use or increase their demand for cadmium telluride, supply could be reduced and prices could increase. If our current suppliers or any of our future suppliers cannot obtain sufficient tellurium, they could substantially increase prices or be unable to perform under their contracts. We may be unable to pass increases in the cost of our raw materials through to our customers because our customer contracts do not adjust for raw material price increases and are generally for a longer term than our raw material supply contracts. A reduction in our production could result in our inability to meet our capacity ramp plan and/or our commitments under our customer contracts, which would have an adverse impact on our financial results.
 
Our future success depends on our ability to continue to build new manufacturing plants and add production lines in a cost-effective manner, both of which are subject to risks and uncertainties.
 
Our future success depends on our ability to significantly increase both our manufacturing capacity and production throughput

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in a cost-effective and efficient manner. If we cannot do so, we may be unable to expand our business, decrease our manufacturing cost per watt, maintain our competitive position, satisfy our contractual obligations, or sustain profitability. Our ability to expand production capacity is subject to significant risks and uncertainties, including the following:
 
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making changes to our production process that are not properly qualified or that may cause problems with the quality of our solar modules;
 
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delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as our inability to secure successful contracts with equipment vendors;
 
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our custom-built equipment taking longer and costing more to manufacture than expected and not operating as designed;
 
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delays or denial of required approvals by relevant government authorities;
 
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being unable to hire qualified staff; 
 
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failure to execute our expansion plans effectively; and
 
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manufacturing concentration risk resulting from an expected 24 out of 46 announced production lines worldwide by the end of 2012 being located in one geographic area, Malaysia.
 
If our future production lines are not built in line with our committed schedules it may impair our growth plans. If our future production lines do not achieve operating metrics similar to our existing production lines, our solar modules could perform below expectations and cause us to lose customers.
 
Currently, our production lines have a limited history of operating at full capacity. Future production lines could produce solar modules that have lower efficiencies, higher failure rates, and higher rates of degradation than solar modules from our existing production lines, and we could be unable to determine the cause of the lower operating metrics or develop and implement solutions to improve performance. Although we will be using the same systematic replication process to build our U.S., Vietnamese, and French manufacturing centers and expand our German and Malaysian manufacturing centers that we successfully used when previously building and expanding our existing German and Malaysian production facilities, our replication risk in connection with building production lines at our manufacturing centers and other future manufacturing plants could be higher than our replication risk was in building and expanding our existing German and Malaysian production facilities because these new manufacturing centers will be located in new geographic areas for us, which could entail other factors that may lower their operating metrics. If we are unable to systematically replicate our production lines to meet our committed schedules and achieve and sustain similar operating metrics in our future production lines as we have achieved at our existing production lines, our manufacturing capacity could be substantially constrained, our manufacturing costs per watt could increase, and this may impair our growth plans and/or cause us to lose customers, resulting in lower net sales, higher liabilities, and lower net income than we anticipate. In addition, we might be unable to produce enough solar modules to satisfy our contractual requirements under our customer contracts.
 
Some of our manufacturing equipment is customized and sole sourced. If our manufacturing equipment fails or if our equipment suppliers fail to perform under their contracts, we could experience production disruptions and be unable to satisfy our contractual requirements.
 
Some of our manufacturing equipment is customized to our production lines based on designs or specifications that we provide to the equipment manufacturer, which then undertakes a specialized process to manufacture the custom equipment. As a result, the equipment is not readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If any piece of equipment fails, production along the entire production line could be interrupted and we could be unable to produce enough solar modules to satisfy our contractual requirements under our Supply Contracts. In addition, the failure of our equipment suppliers to supply equipment in a timely manner or on commercially reasonable terms could delay our expansion plans and otherwise disrupt our production schedule or increase our manufacturing costs, all of which would adversely impact our financial results.
 
If we are unable to further increase the number of sellable watts per solar module and reduce our manufacturing cost per watt, we could be in default under certain of our Supply Contracts and our profitability could decline.
 
Our Supply Contracts either (i) require us to increase the minimum average number of watts per module over the term of the contract, or (ii) have a price adjustment for increases or decreases in the number of watts per module relative to a base number of

21

 

watts per module. Our failure to achieve these metrics could reduce our profitability or allow some of our customers to terminate their contracts. In addition, all of our Supply Contracts in Europe specify a sales price per watt that declines at the beginning of each year through the expiration date of each contract in 2012. Our profitability could decline if we are unable to reduce our manufacturing cost per watt by at least the same rate at which our contractual prices decrease. Furthermore, our failure to reduce cost per watt by increasing our efficiency may impair our ability to enter new markets that we believe will require lower cost per watt for us to be competitive and may impair our growth plans.
 
We may be unable to manage the expansion of our operations effectively.
 
We expect to continue to expand our business in order to meet our contractual obligations, satisfy demand for our solar modules, and maintain or increase market share. However, depending on the amount of additional contractual obligations we enter into and our ability to expand our manufacturing capabilities in accordance with our expectations, we might be unable to produce enough solar modules to satisfy our contractual requirements under our customer contracts and other commitments, in which case we could be in default under such agreements and our operating results may be adversely affected.
 
To manage the continued rapid expansion of our operations, we will be required to continue to improve our operational and financial systems, procedures and controls, and expand, train, and manage our growing associate base. Our management will also be required to maintain and expand our relationships with customers, suppliers, and other third parties and attract new customers and suppliers. In addition, our current and planned operations, personnel, systems, and internal controls and procedures might be inadequate to support our future growth. If we cannot manage our growth effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.
 
Implementing a new enterprise resource planning system could interfere with our business or operations and could adversely impact our financial position, results of operations, and cash flows.
 
We are in the process of implementing a new enterprise resource planning (ERP) system. Phase 1 of this implementation was completed in the second half of 2010, and the second and final phase of this implementation is expected to be completed in the second half of 2011. This project requires significant investment of capital and human resources, the re-engineering of many processes of our business, and the attention of many associates and managers who would otherwise be focused on other aspects of our business. Any disruptions, delays, or deficiencies in the design and implementation of the new ERP system could result in potentially much higher costs than we had anticipated and could adversely affect our ability to process customer orders, ship products, provide services and support to customers, bill and track our customers, fulfill contractual obligations, file SEC reports in a timely manner and/or otherwise operate our business, or otherwise impact our controls environment, and any of these consequences could have an adverse effect on our financial position, results of operations, and cash flows.
 
Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor, and tax conditions in foreign countries.
 
We have significant marketing, distribution, and manufacturing operations both within and outside the United States. In 2010, 74% of our net sales were generated from customers headquartered in the European Union. In the future, we expect to expand our operations into China, India, and other countries in Europe, Asia, the Middle East, and elsewhere; as a result, we will be subject to the legal, political, social, tax, and regulatory requirements, and economic conditions of many jurisdictions. Risks inherent to international operations, include, but are not limited to, the following:
 
•    
difficulty in enforcing agreements in foreign legal systems;
 
•    
varying degrees of protection afforded to foreign investments in the countries in which we operate, and irregular interpretations and enforcement of laws and regulations in these jurisdictions;
 
•    
foreign countries may impose additional income and withholding taxes or otherwise tax our foreign operations, impose tariffs, or adopt other restrictions on foreign trade and investment, including currency exchange controls;
 
•    
fluctuations in exchange rates may affect product demand and may adversely affect our profitability in U.S. dollars to the extent the price of our solar modules and cost of raw materials, labor, and equipment is denominated in a foreign currency;
 
•    
inability to obtain, maintain, or enforce intellectual property rights;
 
•    
risk of nationalization or other expropriation of private enterprises;

22

 

 
•    
changes in general economic and political conditions in the countries in which we operate, including changes in the government incentives we are relying on;
 
•    
unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to environmental protection, export duties, and quotas;
 
•    
opaque approval processes in which the lack of transparency may cause delays and increase the uncertainty of project approvals;
 
•    
difficulty in staffing and managing widespread operations;
 
•    
difficulty in repatriating earnings;
 
•    
difficulty in negotiating a successful collective bargaining agreement in applicable foreign jurisdictions;
 
•    
trade barriers such as export requirements, tariffs, taxes, local content requirements, and other restrictions and expenses, which could increase the price of our solar modules and make us less competitive in some countries; and
 
•    
difficulty of, and costs relating to, compliance with the different commercial and legal requirements of the overseas countries in which we offer and sell our solar modules.
 
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social, and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.
 
Risks Related to Our Systems Business
 
Project development or construction activities may not be successful and projects under development may not receive required permits or construction may not commence as scheduled, which could increase our costs and impair our ability to recover our investments.
 
The development and construction of solar power electric generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built. Success in developing a particular project is contingent upon, among other things:
 
•    
negotiation of satisfactory engineering, procurement, and construction agreements;
 
•    
receipt of required governmental permits and approvals, including the right to interconnect to the electric grid;
 
•    
payment of interconnection and other deposits (some of which are non-refundable);
 
•    
obtaining construction financing; and
 
•    
timely implementation and satisfactory completion of construction.
 
Successful completion of a particular project may be adversely affected by numerous factors, including:
 
•    
delays in obtaining required governmental permits and approvals;
 
•    
uncertainties relating to land costs for projects on land subject to Bureau of Land Management procedures;
 
•    
unforeseen engineering problems;
 
•    
construction delays and contractor performance shortfalls;
 
•    
work stoppages;

23

 

 
•    
cost over-runs;
 
•    
labor, equipment and materials supply shortages or disruptions;
 
•    
tax treatment;
 
•    
adverse weather conditions; and
 
•    
environmental and geological conditions.
 
If we are unable to complete the development of a solar power facility, or fail to meet one or more agreed target construction milestone dates, we may be subject to liquidated damages and/or penalties under the EPC agreement or other agreements relating to the project, and we typically will not be able to recover our investment in the project. Some of these investments are included as assets on our consolidated balance sheet under the line item “Project assets.” If we are unable to complete the development of a solar power project, we may write-down or write-off some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized. In 2011, we expect to invest a significant amount of capital to develop projects owned by us or third parties.
 
 We may enter into fixed price EPC contracts in which we act as the general contractor for our customers in connection with the installation of our solar power systems. All essential costs are estimated at the time of entering into the EPC contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the subcontractors, suppliers, and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning a project occur (including those due to unexpected increases in inflation or commodity prices) or delays in execution occur and we are unable to increase commensurately the EPC sales price, we may not achieve our expected margins or we may be required to record a loss in the relevant fiscal period.
 
We may be unable to acquire or lease land and/or obtain the approvals, licenses, and permits necessary to build and operate PV power plants in a timely and cost effective manner, and regulatory agencies, local communities, labor unions or other third parties may delay, prevent, or increase the cost of construction and operation of the PV plants we intend to build.
 
In order to construct and operate our PV plants, we need to acquire or lease land and obtain all necessary local, county, state, federal, and foreign approvals, licenses, and permits. We may be unable to acquire the land or lease interests needed, may not receive or retain the requisite approvals, permits, and licenses, or may encounter other problems which could delay or prevent us from successfully constructing and operating PV plants. For instance, the California Independent System Operator has modified its transmission interconnection rules, phasing out a serial process in favor of a cluster process for new projects, and may further modify its rules in a manner that could negatively impact our favorable position in transmission queues. Certain of our California projects under development will remain subject to the serial process while other projects in earlier stages of development, as well as new projects on a going-forward basis, will be subject to the cluster process. Although the transition to the cluster process is still evolving and its ultimate impact is not yet fully known, our project transmission cost could be materially higher than previously estimated under the serial process and our projects could be delayed or subject to transmission planning timing uncertainties. We also may be required to post interconnection deposits (which may not be refundable) sooner than previously estimated under the serial process. 
 
Many of our proposed PV plants are located on or require access through public lands administered by federal and state agencies pursuant to competitive public leasing and right-of-way procedures and processes. The authorization for the use, construction, and operation of PV plants and associated transmission facilities on federal, state, and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way, and other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and, potentially, excessive delay in obtaining such permits due, for example, to litigation or third party appeals, could prevent us from successfully constructing and operating PV plants in a timely manner and could result in a potential forfeiture of any deposit we have made with respect to a given project. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project.
 
In addition, local labor unions may increase the cost of, and/or lower the productivity of, project development in Canada, California, and elsewhere. We may also be subject to labor unavailability and/or increased union labor requirements due to multiple simultaneous projects in a geographic region

24

 

 
In China our projects are subject to a number of government approvals, including the approval of a pre-feasibility and feasibility study. Individually, the pre-feasibility and feasibility study require many different government approvals at the national, provincial, and local levels, and the approval process is discretionary and not fully transparent.
 
Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other systems constraints could significantly impact our ability to build PV plants and generate solar electricity power sales.
 
In order to deliver electricity from our PV plants to our customers, our projects need to connect to the transmission grid. The lack of available capacity on the transmission grid could substantially impact our projects and cause reductions in project size, delays in project implementation, increases in costs from transmission upgrades, and potential forfeitures of any deposit we have made with respect to a given project. These transmission issues, as well as issues relating to the availability of large systems such as transformers and switch gear, could significantly impact our ability to build PV plants and generate solar electricity sales.
 
Our systems business is largely dependent on us and third parties arranging financing from various sources, which may not be available or may only be available on unfavorable terms or in insufficient amounts.
 
The construction of the large utility-scale solar power projects under development by us is expected in many cases to require project financing, including non-recourse project debt financing in the bank loan market and institutional debt capital markets. Uncertainties exist as to whether our projects will be able to access the debt markets in a sufficient magnitude to finance their construction. If we are unable to arrange such financing or if it is only available on unfavorable terms, we may be unable to fully execute our systems business plan. In addition, we generally expect to sell our projects by raising project equity capital from tax oriented, strategic industry, and other equity investors. Such equity sources may not be available or may only be available in insufficient amounts, in which case our ability to sell our projects may be delayed or limited and our business, financial condition, or results of operations may be adversely affected.
 
In addition, for projects in which we provide EPC services but are not the project developer, our EPC activities are in many cases dependent on the ability of third parties to purchase our PV plant projects, which, in turn, is dependent on their ability to obtain financing for such purchases. Depending on prevailing conditions in the credit markets and other factors, such financing may not be available or may only be available on unfavorable terms or in insufficient amounts. If third parties are limited in their ability to access financing to support their purchase of PV power plant projects from us, we may not realize the cash flows that we expect from such sales, and this could adversely affect our ability to invest in our business and/or generate revenue. See also the risk factor above entitled "An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets (including a reduction in total tax equity availability) could make it difficult for end-users to finance the cost of a PV system and could reduce the demand for our solar modules and/or lead to a reduction in the average selling price for PV modules.
 
Developing solar power projects may require significant upfront investment prior to the signing of a power purchase agreement or an EPC contract, which could adversely affect our business and results of operations.
 
Our solar power project development cycles, which span the time between the identification of land and the commercial operation of a PV power plant project, vary substantially and can take many months or years to mature. As a result of these long project cycles, we may need to make significant upfront investments of resources (including, for example, large transmission deposits or other payments, which may be non-refundable) in advance of the signing of PPAs and EPC contracts and the receipt of any revenue, much of which is not recognized for several additional months or years following contract signing. Our potential inability to enter into sales contracts with potential customers after making such upfront investments could adversely affect our business and results of operations.
 
Our liquidity may be adversely affected to the extent the project sale market weakens and we are unable to sell our solar projects on pricing, terms and timing commercially acceptable to us.
 
Other Risks
 
We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.
 
We have made several acquisitions in the last several years, and in the future we may acquire additional companies, project pipelines, products, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of an acquisition and each acquisition has numerous risks. These risks include the following:

25

 

 
•    
difficulty in assimilating the operations and personnel of the acquired company;
 
•    
difficulty in effectively integrating the acquired technologies or products with our current products and technologies;
 
•    
difficulty in maintaining controls, procedures, and policies during the transition and integration;
 
•    
disruption of our ongoing business and distraction of our management and associates from other opportunities and challenges due to integration issues;
 
•    
difficulty integrating the acquired company’s accounting, management information, and other administrative systems;
 
•    
inability to retain key technical and managerial personnel of the acquired business;
 
•    
inability to retain key customers, vendors, and other business partners of the acquired business;
 
•    
inability to achieve the financial and strategic goals for the acquired and combined businesses;
 
•    
incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
 
•    
potential impairment of our relationships with our associates, customers, partners, distributors, or third party providers of technology or products;
 
•    
potential failure of the due diligence processes to identify significant issues with product quality, architecture, and development or legal and financial liabilities, among other things;
 
•    
potential inability to assert that internal controls over financial reporting are effective;
 
•    
potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and
 
•    
potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings.
 
Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations.
 
Our future success depends on our ability to retain our key associates and to successfully integrate them into our management team.
 
We are dependent on the services of our executive officers and other members of our senior management team. The loss of one or more of these key associates or any other member of our senior management team could have a material adverse effect on us. We may not be able to retain or replace these key associates, and we may not have adequate succession plans in place. Several of our current key associates including our executive officers are subject to employment conditions or arrangements that contain post-employment non-competition provisions. However, these arrangements permit the associates to terminate their employment with us upon little or no notice and the enforceability of the non-competition provisions is uncertain.
 
If we are unable to attract, train, and retain key personnel, our business may be materially and adversely affected.
 
Our future success depends, to a significant extent, on our ability to attract, train, and retain management, operations, and technical personnel. Recruiting and retaining capable personnel, particularly those with expertise in the PV industry and thin-film technology, are vital to our success. There is substantial competition for qualified technical personnel and there can be no assurance that we will be able to attract or retain our technical personnel. If we are unable to attract and retain qualified associates, or otherwise experience labor disruptions our business may be materially and adversely affected.
 
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards or prohibit us from the manufacture and sale of our solar modules or the use of our technology.

26

 

 
Our success depends largely on our ability to use and develop our technology and know-how without infringing or misappropriating the intellectual property rights of third parties. The validity and scope of claims relating to PV technology patents involve complex scientific, legal, and factual considerations and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, which may not be available on reasonable terms, or at all, or pay ongoing royalties, require us to redesign our solar module, or subject us to injunctions prohibiting the manufacture and sale of our solar modules or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our solar modules until the resolution of such litigation.
 
Currency translation and transaction risk may negatively affect our net sales, cost of sales, and gross margins and could result in exchange losses.
 
Although our reporting currency is the U.S. dollar, we conduct our business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. For example, 73% and 86% of our net sales were denominated in euro for the years ended December 31, 2010 and December 26, 2009, respectively, and we expect a large percentage of our net sales to be outside the United States and denominated in foreign currencies in the future. In addition, our operating expenses for our manufacturing plants located outside the U.S. (currently Germany and Malaysia, and Vietnam and France in the future) and our operations for our systems business in European countries and Canada will be denominated in the local currency. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our net sales and cost of sales and could result in exchange gains or losses. For example, the weakening of the euro reduced our net sales by $49.4 million during fiscal 2010 compared with fiscal 2009. In addition, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from our reporting currency. For example, our European Supply Contracts specify fixed pricing in euros through 2012 and do not adjust for changes in the U.S. dollar to euro exchange rate. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.
 
We could also expand our business into emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such emerging markets could cause our exposure to changes in exchange rates to increase.
 
Our ability to hedge foreign currency exposure is dependent on our credit profile with the banks that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposure; and therefore, result in exchange losses.
 
The Estate of John T. Walton and its affiliates have significant control over us and their interests may conflict with or differ from interests of other stockholders.
 
Our largest stockholder, the Estate of John T. Walton and its affiliates, including JCL Holdings, LLC and JTW Trust No. 1 UAD 9/19/02 (collectively, the Estate), owned approximately 33% of our outstanding common stock at December 31, 2010. As a result, the Estate has substantial influence over all matters requiring stockholder approval, including the election of our directors and the approval of significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets. The interests of the Estate could conflict with or differ from interests of other stockholders. For example, the concentration of ownership held by the Estate could delay, defer or prevent a change of control of our company or impede a merger, takeover, or other business combination which a majority of stockholders may view favorably.
 
If our goodwill or project assets become impaired, we may be required to record a significant charge to earnings.
 
We may be required to record a significant charge to earnings in our financial statements should we determine that our goodwill or project assets are impaired. Such a charge might have a significant impact on our financial position and results of operations.
 
As required by accounting rules, we review our goodwill and project assets for impairment when events or changes in our business or circumstances indicate that their fair value might be less than their carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might not be recoverable include a significant decline in our stock price and market capitalization, a significant decline in projections of future cash flows and significantly slower growth rates in our industry. We are also required to test goodwill for impairment at least annually. We would write down project assets,

27

 

which are capitalized on the balance sheet for certain solar power projects, should we determine that the project is not commercially viable.
 
Unanticipated changes in our tax provisions, the adoption of a new U.S. tax legislation, or exposure to additional income tax liabilities could affect our profitability.
 
We are subject to income taxes in the United States and the foreign jurisdictions in which we operate. Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding, and other items in inter-company transactions. We are subject to potential tax examinations in these various jurisdictions. Tax authorities may disagree with our inter-company charges, cross-jurisdictional transfer pricing or other tax positions and assess additional taxes. We regularly assess the likely outcomes of these examinations in order to determine the appropriateness of our tax provision in accordance with ASC 740, Income Taxes. However, there can be no assurance that we will accurately predict the outcomes of these potential examinations, and the amounts ultimately paid upon resolution of examinations could be materially different from the amounts previously included in our income tax expense and therefore, could have a material impact on our tax provision, net income, and cash flows. In addition, our future effective tax rate could be adversely affected by changes to our operating structure, loss of our Malaysian tax holiday, changes in the mix of earnings in countries with tax holidays or differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. In addition, recently announced proposals for new U.S. tax legislation could have a material effect on the results of our operations; if enacted.
 
Our credit agreements contain covenant restrictions that may limit our ability to operate our business.
 
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, and obtain additional financing, if needed, because our revolving credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, and our Malaysian facility agreement contain, and any of our other future debt agreements may contain, covenant restrictions that limit our ability to, among other things:
 
•    
incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;
 
•    
create liens;
 
•    
enter into certain transactions with our affiliates;
 
•    
sell certain assets; and
 
•    
declare or pay dividends, make other distributions to stockholders, or make other restricted payments.
 
Under our revolving credit agreement and our Malaysian facility agreement, we are also subject to certain financial condition covenants. Our ability to comply with covenants under our credit agreements is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under these agreements and any of our other future debt agreements, which if not cured or waived, could permit the holders thereof to accelerate such debt. If any of our debt is accelerated, we may in the future not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operations.
 
Item 1B:  Unresolved Staff Comments
 
None.
 
Item 2:  Properties
 
As of February 24, 2011, our principal properties consisted of the following:

28

 

Nature
 
Primary Segment(s) Using Property
 
Location
 
Held
 
Major Encumbrances
Manufacturing Plant
 
Components
 
Perrysburg, Ohio, United States
 
Own
 
State of Ohio Loan (1)
Manufacturing Plant
 
Components
 
Frankfurt/Oder, Germany
 
Own
 
None
Manufacturing Plants
 
Components
 
Kulim, Kedah, Malaysia
 
Lease Land/Own Buildings
 
n/a
Corporate Headquarters
 
Components & Systems
 
Tempe, Arizona, United States
 
Lease
 
n/a
Administrative Office
 
Components & Systems
 
Bridgewater, New Jersey, United States
 
Lease
 
n/a
Administrative Office
 
Components & Systems
 
New York, New York, United States
 
Lease
 
n/a
Administrative Office
 
Systems
 
Oakland, California, United States
 
Lease
 
n/a
Administrative Office
 
Systems
 
San Francisco, California, United States
 
Lease
 
n/a
Administrative Office
 
Components
 
Santa Clara, California, United States
 
Lease
 
n/a
Administrative Office
 
Components & Systems
 
Mainz, Germany
 
Lease
 
n/a
 
(1)    
See Note 14. "Debt," to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
 
In addition, we lease office space in several other U.S. and international locations.
 
As of February 24, 2011, we operated 28 production lines with an annual global manufacturing capacity of approximately 1.8 GW (based on the average per line run rate for the fourth quarter of 2010 at our existing plants) at our manufacturing plants in Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia. All of our manufacturing plants are at full productive capacity and operate 24 hours a day, seven days a week. We expect to increase our manufacturing capacity to 46 production lines (including our previously announced four-line plants in Vietnam and the United States) by the end of 2012, with an annual global manufacturing capacity of approximately 2.9 GW (based on the average per line run rate for the fourth quarter of 2010 at our existing plants). We have put the construction of our Blanquefort, France manufacturing plant on hold until we have greater clarity about the future of the French market.
 
Item 3:  Legal Proceedings
 
General
 
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations, and claims, including, but not limited to, routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows, or financial condition.
 
Item 4:  [Removed and Reserved]
 
None.
 
PART II
 
Item 5:  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
 
Price Range of Common Stock
 
Our common stock has been listed on The NASDAQ Global Select Market under the symbol “FSLR” since November 17, 2006. Prior to this time, there was no public market for our common stock. The following table sets forth the range of high and low sales prices per share as reported on The NASDAQ Global Select Market for the periods indicated.

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High
 
Low
Fiscal Year 2010
 
 
 
 
First Quarter
 
$
142.46
 
 
$
98.71
 
Second Quarter
 
$
152.53
 
 
$
100.19
 
Third Quarter
 
$
148.16
 
 
$
112.06
 
Fourth Quarter
 
$
153.30
 
 
$
120.90
 
Fiscal Year 2009
 
 
 
 
 
 
First Quarter
 
$
165.20
 
 
$
100.90
 
Second Quarter
 
$
207.51
 
 
$
129.78
 
Third Quarter
 
$
176.05
 
 
$
112.09
 
Fourth Quarter
 
$
162.20
 
 
$
115.09
 
 
The closing sales price of our common stock on The NASDAQ Global Select Market was $164.68 per share on February 24, 2011. As of February 24, 2011 there were 57 record holders of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee names.
 
Dividend Policy
 
We have never paid, and it is our present intention for the foreseeable future not to pay, dividends on our common stock. Our revolving credit facility imposes restrictions on our ability to declare or pay dividends. The declaration and payment of dividends is subject to the discretion of our board of directors and depends on various factors, including the continued applicability of the above-referenced restrictions under our revolving credit facility, our net income, financial condition, cash requirements, future prospects, and other factors deemed relevant by our board of directors.
 
Equity Compensation Plans
 
The following table sets forth certain information, as of December 31, 2010, concerning securities authorized for issuance under all equity compensation plans of our company:
Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (a)(1)(3)
 
Weighted-Average Exercise Price of Outstanding Options and Rights (b)(2)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(c)(4)
Equity compensation plans approved by our stockholders
 
2,185,565
 
 
$
55.42
 
 
10,002,336
 
Equity compensation plans not approved by our stockholders
 
 
 
 
 
 
Total
 
2,185,565
 
 
$
55.42
 
 
10,002,336
 
 
(1)    
Includes 1,768,720 shares issuable upon vesting of RSUs granted under the 2006 and 2010 Omnibus Incentive Compensation Plans. The remaining balance consists of outstanding stock option grants.
 
(2)    
The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price.
 
(3)    
Includes our 2003 Unit Option Plan and our 2006 and 2010 Omnibus Incentive Compensation Plans.
 
(4)    
Includes our 2003 Unit Option Plan and 2010 Omnibus Incentive Compensation Plan.
 
Stock Price Performance Graph
 
The following graph compares the cumulative 49-month total return on our common stock with the cumulative total returns of the S&P 500 Index, the Guggenheim Solar Index, and a peer group consisting of six comparable issuers: Q-Cells SE; SolarWorld

30

 

AG; SunPower Corporation; Suntech Power Holdings Company, Limited; Trina Solar Limited; and Yingli Green Energy Holding Company Limited. We believe that a peer group consisting of comparable issuers and the Guggenheim Solar Index is representative of the solar industry as a whole. In the stock price performance graph included below, an investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on November 17, 2006 (October 31, 2006 for index), and its relative performance is tracked through December 31, 2010. No cash dividends have been declared on shares of our common stock. This performance graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof, and irrespective of any general incorporation language in any such filing. The stock price performance shown on the graph represents past performance and should not be considered an indication of future price performance.
 
 
 
11/17/06
12/30/06
12/29/07
12/27/08
12/26/09
12/31/10
First Solar, Inc.
$
100.00
 
$
120.61
 
$
1,075.34
 
$
545.72
 
$
540.82
 
$
526.03
 
S&P 500 Index
$
100.00
 
$
103.33
 
$
109.01
 
$
68.68
 
$
86.85
 
$
99.93
 
Peer Group
$
100.00
 
$
116.03
 
$
323.17
 
$
58.60
 
$
75.21
 
$
39.79
 
Guggenheim Solar Index
$
100.00
 
$
100.00
 
$
100.00
 
$
100.00
 
$
131.75
 
$
94.34
 
 
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
 
Recent Sales of Unregistered Securities

31

 

 
As previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on April 9, 2009, on April 3, 2009, we completed the acquisition of the solar power project development business (the Project Business) of OptiSolar Inc., a Delaware corporation (OptiSolar). Pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated as of March 2, 2009 by and among First Solar, First Solar Acquisition Corp., a Delaware corporation (Merger Sub), OptiSolar, and OptiSolar Holdings LLC, a Delaware limited liability company (OptiSolar Holdings), Merger Sub merged with and into OptiSolar, with OptiSolar surviving as a wholly-owned subsidiary of First Solar (the Merger). Pursuant to the Merger, all of 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), including (i) 732,789 shares that have been issued and deposited with an escrow agent to support certain indemnification obligations of OptiSolar Holdings, and (ii) 355,096 shares that were issuable upon satisfaction of conditions relating to the satisfaction of certain then existing liabilities of OptiSolar (the Holdback Shares). The Merger Shares and certain Holdback Shares were issued, and any remaining Holdback Shares will be issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. First Solar has prepared and filed with the Securities and Exchange Commission a registration statement under the Securities Act covering the resale of 2,801,435 of the Merger Shares.
 
During 2010, 12,847 Holdback Shares were issued to OptiSolar Holdings. As of December 31, 2010, 346,779 Holdback Shares had been issued to OptiSolar Holdings, and a total of 2,964,103 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.
 
Purchases of Equity Securities by the Issuer and Affiliate Purchases
 
None.
 
 
Item 6:  Selected Financial Data
 
The following table sets forth our selected consolidated financial data for the periods and at the dates indicated.
 
The selected consolidated financial information for the fiscal years ended December 31, 2010, December 26, 2009, and December 27, 2008 has been derived from the audited consolidated financial statements included in this Annual Report on Form 10-K. The selected consolidated financial data for the fiscal years ended December 29, 2007 and December 30, 2006 have been derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The information presented below should be read in conjunction with Item 7: "Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes thereto.

32

 

 
 
Years Ended
 
 
 
Dec 31,
2010
 
Dec 26,
2009
 
Dec 27,
2008
 
Dec 29,
2007
 
Dec 30,
2006
 
 
(In thousands, except per share amounts)
Statement of Operations:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,563,515
 
 
$
2,066,200
 
 
$
1,246,301
 
 
$
503,976
 
 
$
134,974
 
Cost of sales
 
1,378,669
 
 
1,021,618
 
 
567,908
 
 
252,573
 
 
80,730
 
Gross profit
 
1,184,846
 
 
1,044,582
 
 
678,393
 
 
251,403
 
 
54,244
 
Research and development
 
94,797
 
 
78,161
 
 
33,517
 
 
15,107
 
 
6,361
 
Selling, general and administrative
 
321,704
 
 
272,898
 
 
174,039
 
 
82,248
 
 
33,348
 
Production start-up
 
19,442
 
 
13,908
 
 
32,498
 
 
16,867
 
 
11,725
 
Operating income
 
748,903
 
 
679,615
 
 
438,339
 
 
137,181
 
 
2,810
 
Foreign currency (loss) gain
 
(3,468
)
 
5,207
 
 
5,722
 
 
1,881
 
 
5,544
 
Interest income
 
14,375
 
 
9,735
 
 
21,158
 
 
20,413
 
 
2,648
 
Interest expense, net
 
(6
)
 
(5,258
)
 
(509
)
 
(2,294
)
 
(1,023
)
Other income (expense), net
 
2,273
 
 
(2,985
)
 
(934
)
 
(1,219
)
 
(799
)
Income tax expense (benefit)
 
97,876
 
 
46,176
 
 
115,446
 
 
(2,392
)
 
5,206
 
Net income
 
$
664,201
 
 
$
640,138
 
 
$
348,330
 
 
$
158,354
 
 
$
3,974
 
Net income per share data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 
$
7.82
 
 
$
7.67
 
 
$
4.34
 
 
$
2.12
 
 
$
0.07
 
Weighted average shares
 
84,891
 
 
83,500
 
 
80,178
 
 
74,701
 
 
56,310
 
Diluted net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 
$
7.68
 
 
$
7.53
 
 
$
4.24
 
 
$
2.03
 
 
$
0.07
 
Weighted average shares
 
86,491
 
 
85,044
 
 
82,124
 
 
77,971
 
 
58,255
 
Cash dividends declared per common share
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
 
 
Years Ended
 
 
 
Dec 31,
2010
 
Dec 26,
2009
 
Dec 27,
2008
 
Dec 29,
2007
 
Dec 30,
2006
 
 
(In thousands)
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
705,492
 
 
$
675,193
 
 
$
463,067
 
 
$
205,951
 
 
$
(576
)
Net cash used in investing activities
 
(742,085
)
 
(701,690
)
 
(308,441
)
 
(547,250
)
 
(159,994
)
Net cash provided by (used in) financing activities
 
150,451
 
 
(22,021
)
 
177,549
 
 
430,421
 
 
451,550
 

33

 

 
 
Years Ended
 
 
 
Dec 31,
2010
 
Dec 26,
2009
 
Dec 27,
2008
 
Dec 29,
2007
 
Dec 30,
2006
 
 
(In thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
765,689
 
 
$
664,499
 
 
$
716,218
 
 
$
404,264
 
 
$
308,092
 
Marketable securities, current and noncurrent
 
348,160
 
 
449,844
 
 
105,601
 
 
265,399
 
 
323
 
Accounts receivable, net
 
305,537
 
 
226,826
 
 
61,703
 
 
18,165
 
 
27,123
 
Inventories, current and noncurrent
 
243,170
 
 
174,516
 
 
121,554
 
 
40,204
 
 
16,510
 
Property, plant and equipment, net
 
1,430,789
 
 
988,782
 
 
842,622
 
 
430,104
 
 
178,868
 
Project assets, current and noncurrent
 
320,140
 
 
132,496
 
 
 
 
 
 
 
Deferred tax assets, current and noncurrent
 
259,624
 
 
152,194
 
 
71,247
 
 
55,701
 
 
 
Total assets
 
4,380,403
 
 
3,349,512
 
 
2,114,502
 
 
1,371,312
 
 
578,510
 
Long-term debt
 
237,391
 
 
174,958
 
 
198,470
 
 
108,165
 
 
80,697
 
Accrued solar module collection and recycling liability
 
132,951
 
 
92,799
 
 
35,238
 
 
13,079
 
 
3,724
 
Total liabilities
 
925,458
 
 
696,725
 
 
601,460
 
 
274,045
 
 
116,844
 
Total stockholders’ equity
 
3,454,945
 
 
2,652,787
 
 
1,513,042
 
 
1,097,267
 
 
411,440
 
 
 
Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the “Note Regarding Forward-Looking Statements,” that appears earlier in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under Item 1A: "Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
 
Overview
 
We manufacture and sell solar modules with an advanced thin-film semiconductor technology, and we design, construct, and sell photovoltaic (PV) solar power systems.
 
In furtherance of our goal of delivering the lowest cost of solar electricity and achieving price parity with conventional fossil-fuel based peak electricity generation, we are continually focused on reducing PV solar system costs in four primary areas: module manufacturing, balance-of-system (BoS) costs (consisting of the costs of the components of a solar power system other than the solar modules, such as inverters, mounting hardware, grid interconnection equipment, wiring and other devices, and installation labor costs), project development costs, and the cost of capital. First, with respect to our module manufacturing costs, our advanced technology has allowed us to reduce our average module manufacturing costs to the lowest in the world, based on publicly available information. In 2010, our total average manufacturing costs were $0.77 per watt, which we believe is significantly less than those of traditional crystalline silicon solar module manufacturers. By continuing to improve conversion efficiency and production line throughput, lower material costs, and drive volume scale to further decrease overhead costs, we believe that we can further reduce our manufacturing costs per watt and maintain our cost advantage over traditional crystalline silicon solar module manufacturers. Second, by continuing to improve conversion efficiency, leverage volume procurement around standardized hardware platforms, and accelerate installation time, we believe we can continue to make reductions in BoS costs, which represent over half of all of the costs associated with a typical utility-scale PV solar power system. Third, with respect to project development costs, we seek optimal site locations in an effort to minimize transmission and permitting costs, and to accelerate lead time to electricity generation. Finally, we believe that continuing to strengthen our financial position, including our balance sheet and credit profile, together with our increasing solar power system operating experience, will enable us to continue to lower the cost of capital associated with our solar power systems, thereby further enhancing the economic viability of our projects and lowering the cost of electricity generated by solar power systems that incorporate our modules and technology.
 
We believe that combining our reliable, low cost module manufacturing capability with our systems business enables us to

34

 

more rapidly reduce the price of solar electricity, accelerate the adoption of our technology in large scale systems, identify and break constraints to the successful migration to sustainable solar markets, and further our mission to create enduring value by enabling a world powered by clean, affordable solar electricity.
 
We operate our business in two segments. Our components segment designs, manufactures, and sells solar modules to solar project developers and system integrators. Through our systems segment, we have the capability to provide a complete PV solar power system, using our solar modules, for utility-scale or large commercial systems. Providing a complete PV solar power system includes project development, engineering, procurement, and construction (EPC), operating and maintenance (O&M) services, when applicable, and project finance, when required. We view the sale of solar modules from the components segment as the core driver of our profitability, return on net assets, and cash throughput. We view our systems segment as an enabler to drive module throughput for our components business with the objective of achieving break-even results before income taxes for our systems segment. See also Note 23. "Segment and Geographical Information," to our consolidated financial statements included in this Annual Report on Form 10-K.
 
Historically, our fiscal quarters ended on the Saturday closest to the end of the applicable calendar quarter. In July 2010, our board of directors approved a change in our fiscal year from a 52 or 53 week fiscal year to a calendar year. This change to the calendar year cycle became effective as of the end of the 2010 fiscal year. As a result, our 2010 fiscal year, which began on December 27, 2009, ended on December 31, 2010 instead of December 25, 2010. In addition, effective January 1, 2011, our fiscal quarters will also coincide with calendar quarters. All references to fiscal year 2010 relate to the 53 weeks ended December 31, 2010; all references to fiscal year 2009 relate to the 52 weeks ended December 26, 2009; and all references to fiscal year 2008 relate to the 52 weeks ended December 27, 2008.
 
Manufacturing Capacity
 
As of December 31, 2010, we operated 24 production lines with an annual global manufacturing capacity of approximately 1.5 GW (based on the average per line run rate for the fourth quarter of 2010 at our existing plants) at our manufacturing plants in Perrysburg, Ohio, Frankfurt/Oder, Germany, and Kulim, Malaysia. We expect to increase our manufacturing capacity to 46 production lines (including our previously announced 4-line plants in Vietnam and the United States) by the end of 2012, with an annual global manufacturing capacity of approximately 2.9 GW (based on the average per line run rate for the fourth quarter of 2010 at our existing plants).
 
Market Overview
 
In addressing a growing global demand for PV solar electricity, we target markets with varying approaches depending on the underlying economics, market requirements, and distribution channels. In subsidized FiT markets, such as Germany, we have historically sold most of our solar modules to solar project developers, system integrators, and independent power producers. In other markets, such as the United States, the demand for solar has been primarily driven by state level renewable portfolio standards requiring regulated utilities to supply a portion of their total electricity from renewable energy sources such as solar power. To meet the needs of these markets and enable BoS cost reductions, we have developed a fully integrated systems business that can provide a low-cost turn-key utility-scale PV system solution for system owners and low cost electricity to utility end-users. Our fully integrated systems business has enabled us to increase module throughput, drive cost reduction across the value chain, identify and break constraints to sustainable markets, and to deliver the most compelling solutions to our customers and end-users. With our fully integrated systems business, we believe we are in a position to expand our business in transition markets and eventually economically sustainable markets (in which subsidies or incentives are minimal), which are expected to develop in areas with abundant solar resources and sizable electricity demand. We are committed to continually lowering the cost of solar electricity, and in the long term, we plan to compete on an economic basis with conventional fossil fuel based peaking power generation.
 
Net sales for the year ended December 31, 2010 were primarily driven by revenue recognition on several utility scale solar power projects in North America and strong European installations, primarily in Germany, France, and Italy. Net sales from German customers resulted from a combination of demand in advance of further German FiT reductions (taking effect on July 1, 2010, October 1, 2010, and at the beginning of 2011), customer participation in our rebate program, and improving project finance and overall corporate finance conditions.
 
In light of strong 2010 solar growth, the major European governments are currently seeking to balance subsidy costs with their commitment to the EU directive's goal of a 20% share of energy from renewable sources in the EU by 2020.  Governments in Germany, France, and Italy are in the process of evaluating additional changes to their FiT structures. The German government is expected to adopt a partial acceleration of the January 2012 FiT digression to mid-2011. In Germany, which accounted for approximately 46% of our 2010 net sales, a mid-year FiT decrease (as was effected in 2010), if enacted, could contribute to a short-term pull-in of demand, but carries the potential for tighter economics in the second half of 2011 as the solar industry adjusts

35

 

to lower FiT levels, which may negatively affect long-term demand and price levels for PV products in Germany.  See Item 1: “Business - Support Programs” for a summary of recent developments in the major government subsidy programs in our core and target markets.  In light of continually evolving FiT structures in our core European markets, it is uncertain whether there will be sufficient market demand to absorb industry-wide module supply without significant inventory build-up or price reductions.  We plan to mitigate this uncertainty in part by continuing to use our North American utility-scale systems pipeline as a buffer against demand fluctuations in Europe and elsewhere. 
 
 During 2010, we continued to expand into certain key transition markets, such as the United States, within which affordable solar electricity solutions could be developed and which could ultimately evolve into economically sustainable markets. In January 2010, we completed the acquisition of certain assets from Edison Mission Group's solar project development pipeline consisting of utility-scale solar projects located primarily on private land in California and the southwestern United States. In July 2010, we completed the acquisition of NextLight Renewable Power, LLC, another leading developer of utility-scale solar projects in the southwestern United States. This transaction expanded our pipeline of solar power projects in the southwestern United States and supports our expansion in the U.S. utility-scale market. For instance, in the fourth quarter of 2010, we entered into an agreement to sell to NRG Energy, Inc. the 290 MW AC Agua Caliente solar project, which was part of the Next Light pipeline of projects. Upon its completion, Agua Caliente is expected to be the largest operational PV solar plant in the world.
 
In the PV module segment, we continue to face intense competition from manufacturers of crystalline silicon solar modules and other types of solar modules and PV systems. Solar module manufacturers compete with one another in several product performance attributes, including reliability and module cost per watt, and, with respect to solar power systems, return on equity (ROE) and levelized cost of electricity (LCOE), meaning the net present value of total life cycle costs of the solar power project divided by the quantity of energy which is expected to be produced over the system's life. The ability to expand manufacturing capacity quickly is another source of differentiation among solar module manufacturers, and certain of our competitors may have a faster response time to capacity expansion than we do and/or an ability to expand capacity in finer increments than we can. We are the lowest cost PV module manufacturer in the solar industry, based on publicly available information, as evidenced by the further reduction in our average manufacturing cost per watt from $0.87 during 2009 to $0.77 during 2010. This cost advantage is reflected in the price at which we sell our modules or fully integrated systems and enables our systems to compete favorably in respect of their ROE or LCOE. Our cost competitiveness is based in large part on our proprietary technology (which enables conversion efficiency improvements and enables us to produce a module in less than 2.5 hours using a continuous and highly automated industrial manufacturing process, as opposed to a batch process), our scale, and our operational excellence. In addition, our modules use approximately 1-2% of the amount of semiconductor material that is used to manufacture traditional crystalline silicon solar modules. The cost of polysilicon is a significant driver of the manufacturing cost of crystalline silicon solar modules. The timing and rate of change in the cost of silicon feedstock could lead to changes in solar module pricing levels. Although we are not a crystalline silicon module manufacturer, we estimate, based on industry research and public disclosures of our competitors, that a $10 per Kg increase or decrease in the price of polysilicon could increase or decrease, respectively, our competitors' manufacturing cost per watt by approximately $0.06 to $0.07 over time. Given the lower conversion efficiency of our modules compared to crystalline silicon modules, there may be higher BoS costs associated with systems using our modules. Thus, to compete effectively on the basis of LCOE, our modules may need to maintain a certain cost advantage per watt compared to crystalline silicon-based modules. During 2010, we reduced our manufacturing cost per watt by 11% from our cost per watt in 2009 and continued to reduce BoS costs associated with systems using our modules.
 
While our modules currently enjoy competitive advantages in these product performance attributes, there can be no guarantee that these advantages will continue to exist in the future to the same extent or at all. Any declines in the competitiveness of our products could result in margin compression, a decline in the average selling prices of our solar modules, erosion in our market share for modules, a decrease in the rate of revenue growth, and/or a decline in overall revenues. We have taken, and continue to take, several actions to mitigate the potential impact resulting from competitive pressures, including adjusting our pricing policies as necessary in core market segments to drive module volumes, continuously making progress along our cost reduction roadmap, and focusing our research and development on increasing the conversion efficiency of our solar modules.
 
As we expand our systems business into transition and sustainable markets, we can offer value beyond the PV module, reduce our exposure to module-only competition, and provide comprehensive utility-scale PV systems solutions that significantly reduce solar electricity costs. Thus, our systems business allows us to play a more active role than many of our competitors in managing the demand for and manufacturing throughput of our solar modules. Finally, we seek to form and develop strong partner relationships with our customers and continue to develop our range of offerings, including EPC capabilities and O&M services, in order to enhance the competitiveness of systems using our solar modules.
 
 
Financial Operations Overview
 

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The following describes certain line items in our statement of operations and some of the factors that affect our operating results.
 
Net Sales
 
Components Business
 
Currently, the majority of our net sales are generated from the sale of solar modules. We price and sell our solar modules per watt of power. During 2010, we sold the majority of our solar modules to solar power system project developers, system integrators, and operators headquartered in Germany, Italy, France, Spain, and the United States, which either resell our solar modules to end-users or integrate them into power plants that they own, operate, or sell.
 
As of December 31, 2010, we had Supply Contracts for the sale of solar modules expiring at the end of 2012 with fourteen solar power system project developers and system integrators headquartered within the European Union. These contracts account for a significant portion of our planned production over the period from 2011 through 2012 and, therefore, will significantly affect our overall financial performance. We have the right to terminate certain Supply Contracts upon 12 months notice and the payment of a termination fee if we determine that certain material adverse changes have occurred. In addition, our customers are entitled to certain remedies in the event of missed deliveries of kilowatt volume. These delivery commitments are established through rolling four quarter forecasts that are agreed to with each of the customers within the parameters established in the Supply Contracts and define the specific quantities to be purchased on a quarterly basis and the schedules of the individual shipments to be made to the customers. In the case of a late delivery, certain of our customers are entitled to a maximum charge representing a percentage of the delinquent revenue. If we do not meet our annual minimum volume shipments, our customers also have the right to terminate these contracts on a prospective basis.
 
Our sales prices under the Supply Contracts are denominated in euro, exposing us to risks from currency exchange rate fluctuations. During the year ended December 31, 2010, 73% of our sales were denominated in euro and were subject to fluctuations in the exchange rate between the euro and U.S. dollar.
 
In the past we have amended pricing and other terms in our Supply Contracts on a prospective basis in order to remain competitive, and we may decide in the future to further amend these contracts in order to address the highly competitive environment for solar modules. During the year ended December 26, 2009, we amended our Supply Contracts with certain of our customers to implement a program which provided a price rebate to these customers for solar modules purchased from us. The intent of this program was to enable our customers to successfully compete in our core German market and to adjust, for eligible customers, the sales price (which was documented in framework agreements entered into several years ago) in light of market conditions. The rebate program is offered for a defined period, during which customers may apply and claim such rebate. The most recent rebate offering, for all solar modules sold through November 30, 2010, will terminate on February 28, 2011. Beginning March 1, 2011, we will offer customers a modified rebate program, including applicability to certain European geographic areas in addition to Germany.
 
The rebate amounts continue to be established so as to enable the sell-through of our products at competitive prices. The rebate program applies a specified rebate rate to solar modules sold for solar power projects in certain geographic areas. Customers need to meet certain requirements in order to be eligible for and benefit from this program. As of December 31, 2010 and December 26, 2009, we have experienced approximately 81% and 100% participation in this program by eligible customers, respectively. The lower customer participation at December 31, 2010 was primarily due to the expiration of the current rebate offering period in February 2011.
 
We account for these rebates as a reduction to the selling price of our solar modules and, therefore, as a reduction in revenue at the time of sale and recognize a contra-asset within accounts receivable trade, net. No rebates granted under this program can be claimed for cash; instead, rebates may only be applied to reduce outstanding accounts receivable balances. During 2010, we extended rebates to customers in the amount of €92.1 million ($123.4 million at the average exchange rate of $1.34/€1.00). At December 31, 2010, we had €19.6 million ($26.1 million at the balance sheet close rate on December 31, 2010 of $1.33/€1.00) of rebate claims accrued, which reduced our accounts receivable accordingly. During the year ended December 26, 2009, we extended rebates to customers in the amount of €87.1 million ($128.9 million at an average exchange rate of $1.48/€1.00). At December 26, 2009, we had €54.3 million ($72.2 million at the balance sheet close rate on December 31, 2010 of $1.33/€1.00) of rebate claims accrued, which reduced our accounts receivable accordingly.
 
We also enter into one-time module sales agreements with customers for specific projects.
 
Under our customer contracts, we transfer title and risk of loss to the customer and recognize revenue upon shipment. Our

37

 

customers do not have extended payment terms or rights of return under these contracts.
 
During 2010, the principal customers of our components business were EDF EN Development, Juwi Solar GmbH, and Phoenix Solar AG. During 2010, each of these three customers individually accounted for between 10% and 20% of our components segment’s net sales. All of our other customers individually accounted for less than 10% of our net sales during 2010.
 
Systems Business
 
Through our fully integrated systems business, we provide a complete solar power system solution using our solar modules, which may include project development, EPC services, O&M services, when applicable, and project finance, when required. In July 2010, we completed the acquisition of NextLight Renewable Power, LLC, a leading developer of utility-scale solar projects in the southwestern United States. This transaction expanded our pipeline of solar power projects in the southwestern United States and supports our expansion in the U.S. utility-scale power market.
 
Net sales from our systems segment may include the following types of transactions:
Transaction
 
Description
Engineer and Procure (EP) Contract
 
Design for a customer of a solar electricity generation system that uses our solar modules; includes the procurement of all BoS components from third party suppliers.
 
 
 
Engineer, Procure, and Construct (EPC) Contract
 
Design and construction for a customer of a turn-key solar electricity generation system that uses our solar modules; includes the procurement of all BoS components from third party suppliers.
 
 
 
Sale of Project Assets
 
Sale of project assets to a customer at various stages of development. This generally includes a single project consisting of costs incurred for permits, land or land rights, and/or power off-take agreements.
 
 
 
Operating and Maintenance (O&M) Agreement
 
Typically a fixed-price long-term services agreement.
 
Net sales from our systems segment are impacted by numerous factors, including the magnitude and effectiveness of renewable portfolio standards, economic incentives (such as European FiTs, the U.S. federal investment tax credit, grants in lieu of tax credits under Section 1603 of the American Recovery and Reinvestment Act of 2009, U.S. Department of Energy loan guarantees, or accelerated depreciation), and other PV system demand drivers.
Net sales from our systems business during 2010 resulted primarily from revenue recognition for utility scale solar power projects in North America and Europe. During 2009, net sales from our systems business resulted primarily from the sale of two utility-scale solar power systems in the fourth fiscal quarter to utilities in the United States and Canada.
 
The following table summarizes our projects sold and constructed in 2010:
 
Projects Sold and Constructed in 2010
 
 
Project/Location
Project Size in MW AC
Power Purchase Agreement (PPA)
Third Party Owner
Sarnia, Ontario, Canada - Phase 2
60
 
OPA (2),(3)
Enbridge
Copper Mountain, Nevada
48
 
PG&E (1),(4)
Sempra
Cimarron, New Mexico
30
 
Tri-State (4)
Southern
Total
138
 
 
 
 
Key:
(1)    EPC contract/partner developed project
(2)    OPA = Ontario Power Authority RESOP program

38

 

(3)    Completed in Q3 2010
(4)    Completed in Q4 2010
 
For a given solar power project, we recognize revenue for our systems business either after execution of an EPC agreement with a third party, specifying the terms and conditions of the construction of the solar power plant; by applying the provisions for real estate accounting; by applying the percentage-of-completion method of accounting; or upon the sale of the complete system solution. We apply any particular one of these methods as appropriate based on the specific facts and circumstances related to each project and its sale.
 
The following tables summarize, as of February 24, 2011, our 2.4 GW AC North American utility systems advanced project pipeline:
 
Projects Under Construction or Planned to Commence Construction in 2011 (Includes Both Sold Projects and EPC Contract/Partner Developed Contracts)
Project/Location
Project Size in MW AC
Power Purchase Agreement (PPA)
Third Party Owner
Agua Caliente, Arizona
290
 
PG&E
NRG
St. Clair, Ontario, Canada
40
 
OPA (2)
NextEra
PNM, New Mexico
22
 
UOG (3)
PNM
Santa Teresa, New Mexico
20
 
El Paso (1)
NRG
Walpole, Ontario, Canada
20
 
OPA (2)
GE/Plutonic
Belmont, Ontario, Canada
20
 
OPA (2)
GE/Plutonic
Paloma, Gila Bend, Arizona
17
 
UOG (3)
APS
Amherstburg 2, Ontario, Canada
15
 
OPA (2)
Enbridge
Amherstburg 1, Ontario, Canada
10
 
OPA (2)
GE/Plutonic
Tilbury, Ontario, Canada
5
 
OPA (2)
Enbridge
Total
459
 
 
 
 
Projects Permitted - Not Sold
Project/Location
Project Size in MW AC
Power Purchase Agreement (PPA)
AV Solar Ranch One, California
230
 
PG&E
Silver State North, Nevada
50
 
NV Energy
Total
280
 
 
 
Projects in Development/PPA
Project/Location
Project Size in MW AC
Power Purchase Agreement (PPA)
Topaz, California
550
 
PG&E
Sunlight, California
300
 
PG&E
Sunlight, California
250
 
SCE
Stateline, California
300
 
SCE
Silver State South, Nevada
250
 
SCE
Total
1,650
 
 
 
Key:
(1)    EPC contract/partner developed project
(2)    OPA = Ontario Power Authority RESOP program
(3)    UOG = Utility Owned Generation
 
Cost of Sales

39

 

 
Components Business
 
Our cost of sales includes the cost of raw materials and components for manufacturing solar modules, such as tempered back glass, transparent conductive oxide coated front glass, cadmium telluride, laminate, connector assemblies, laminate edge seal, and other items. Our cost of sales also includes direct labor for the manufacturing of solar modules and manufacturing overhead such as engineering, equipment maintenance, environmental health and safety, quality and production control, and procurement costs. Cost of sales also includes depreciation of manufacturing plant and equipment and facility-related expenses. In addition, we accrue warranty and solar module collection and recycling costs to our cost of sales.
 
We implemented a program in 2005 to collect and recycle our solar modules after their use. Under our solar module collection and recycling program, we enter into an agreement with the end-users of the solar power systems that use our solar modules. In the agreement, we commit, at our expense, to collect the solar modules from the installation site at the end of their useful life and transport them to a processing center where the solar module materials and components will be either refurbished and resold as used solar modules, or recycled to recover some of the raw materials. In return, the owner agrees not to dispose of the solar modules except through our module collection and recycling program or any other program that we might approve of. The owner is also responsible for disassembling the solar modules and packaging them in containers that we provide. At the time we sell a solar module, we record an expense in cost of sales equal to the fair value of the estimated future module collection and recycling obligation. We subsequently record accretion expense on this future obligation, which we classify within selling, general and administrative expense.
 
Overall, we expect our cost of sales per watt to continue to decrease over the next several years due to an increase in sellable watts per solar module, an increase in unit output per production line, continued geographic expansion into lower-cost manufacturing regions, and more efficient absorption of fixed costs driven by economies of scale.
 
Systems Business
 
Within our systems business, project-related costs include standard EPC costs (consisting primarily of BoS costs for inverters, electrical and mounting hardware, project management and engineering costs, and installation labor costs), site specific costs, and development costs (including transmission upgrade costs, interconnection fees, and permitting costs). As further described in Note 23. "Segment and Geographical Information," to our consolidated financial statements included in this Annual Report on Form 10-K, at the time when the revenue recognition criteria are met, we include the sale of our solar modules manufactured by our components business and used by our systems business as net sales of our components business. Therefore, the related cost of sales are also included within our components business at that time.
 
Deferred project costs represent (i) costs that we capitalize for arrangements that we account for as real estate transactions after we have entered into a definitive sales arrangement, but before we have met the 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 the revenue recognition criteria have been met. Deferred project costs capitalized on our balance sheet at December 31, 2010 and December 26, 2009 were $14.4 million and $36.7 million, respectively.
 
Gross Profit
 
Gross profit is affected by numerous factors, including our module average selling prices, foreign exchange rates, the existence and effectiveness of subsidies and other economic incentives, market mix, our manufacturing costs, BoS costs, project development costs, the effective utilization of our production facilities, and the ramp of production on new plants due to a reduced ability to absorb fixed costs until full production volumes are reached. Gross profit is also subject to competitive pressures, and we have in the past and may in the future decide to amend our Supply Contracts, which specify our sales price per watt. Gross profit margin is also affected by the mix of net sales generated by our components and systems businesses. Our systems business generally operates at a lower gross profit margin due to the pass-through nature of certain BoS components procured from third parties. Gross profit for our systems business excludes the sales and cost of sales for solar modules, which we include in the gross profit of our components business.
 
Research and Development
 
Research and development expense consists primarily of salaries and personnel-related costs, the cost of products, materials, and outside services used in our process, and product research and development activities. We acquire equipment for general use

40

 

in further process developments and record the depreciation of this equipment as research and development expense. We expect our research and development expense to increase in absolute terms in the future as we increase personnel and research and development activity. Over time, we expect research and development expense to decline as a percentage of net sales and on a cost per watt basis as a result of economies of scale. Currently, the majority of our research and development expenses are attributable to our components segment.
 
We maintain a number of programs and activities to improve our technology and processes in order to enhance the performance and reduce the costs of our solar modules and PV systems using our modules. We report our research and development expense net of grant funding. During the years ended December 31, 2010 and December 26, 2009, we did not receive any grant funding. We received $0.9 million of grant funding during the year ended December 27, 2008 that we applied towards our research and development programs.
 
Selling, General and Administrative
 
Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expenses, and other selling expenses. We expect these expenses to increase in the near term, both in absolute dollars and as a percentage of net sales, in order to support the growth of our business as we expand our sales and marketing efforts, improve our information processes and systems, and implement the financial reporting, compliance, and other infrastructure required for an expanding public company. Over time, we expect selling, general and administrative expense to decline as a percentage of net sales and on a cost per watt basis as our net sales and our total watts produced increase.
 
Our systems business has certain of its own dedicated administrative key functions, such as accounting, legal, finance, project finance, human resources, procurement, and marketing. Costs for such functions are recorded and included within selling, general and administrative costs for our systems segment. Our corporate key functions consist primarily of company-wide corporate tax, corporate treasury, corporate accounting/finance, corporate legal, investor relations, corporate communications, and executive management functions. Currently our components business benefits the most from these functions and, therefore, we have allocated these costs to this segment as part of selling, general and administrative costs.
 
Production Start-Up
 
Production start-up expense consists primarily of salaries and personnel-related costs and the cost of operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase. It also includes all expenses related to the selection of a new site and the related legal and regulatory costs, and the costs to maintain our plant replication program, to the extent we cannot capitalize these expenditures. We incurred production start-up expense of $32.5 million during the year ended December 27, 2008 in connection with the planning and preparation of our plants at the Malaysian manufacturing center. We incurred production start-up expense of $13.9 million during the year ended December 26, 2009 related to plant four of our Malaysian manufacturing center and our Ohio plant expansion. Production start-up expense for the year ended December 31, 2010 was $19.4 million and related to our eight-line Malaysian, four-line German, one-line Perrysburg, Ohio, and two-line Blanquefort, France manufacturing expansions, including legal, regulatory, and personnel costs. In general, we expect production start-up expense per production line to be higher when we build an entirely new manufacturing facility compared with the addition of new production lines at an existing manufacturing facility, primarily due to the additional infrastructure investment required when building an entirely new facility. Over time, we expect production start-up expense to decline as a percentage of net sales and on a cost per watt basis as a result of economies of scale. Production start-up expense is attributable to our components segment.
 
Foreign Currency (Loss) Gain
 
Foreign currency (loss) gain consists of losses and gains resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our functional currencies.
 
Interest Income
 
Interest income is earned on our cash, cash equivalents, marketable securities, and restricted cash and investments. Interest income also includes interest received from notes receivable and interest collected for late customer payments.
 
Interest Expense, Net
 
Interest expense, net of amounts capitalized, is incurred on various debt financings. We capitalize interest expense into our property, plant and equipment, project assets, and deferred project costs.

41

 

 
Income Tax Expense
 
Income taxes are imposed on our income by taxing authorities in the various jurisdictions in which we operate, principally the United States, Germany, and Malaysia. The statutory federal corporate income tax rate in the United States is 35.0%, while the tax rates in Germany and Malaysia are approximately 28.6% and 25.0%, respectively. In Malaysia, we have been granted a long-term tax holiday, scheduled to expire in 2027, pursuant to which substantially all of our income earned in Malaysia is exempt from income tax.
 
Critical Accounting Estimates
 
In preparing our financial statements in conformity with generally accepted accounting principles in the United States (GAAP), we make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent liabilities in our financial statements and the related notes thereto. Some of our accounting policies require the application of significant judgment by management in the selection of the appropriate assumptions for making these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our judgments and estimates on our historical experience, our forecasts, and other available information, as appropriate. Our significant accounting policies are described in Note 2. "Summary of Significant Accounting Policies," to our consolidated financial statements for the year ended December 31, 2010 included in this Annual Report on Form 10-K.
 
Our critical accounting estimates, which require the most significant management estimates and judgment in determining amounts reported in our consolidated financial statements included in this Annual Report on Form 10-K, are as follows:
 
Accrued Solar Module Collection and Recycling Liability. At the time of sale, we recognize an expense for the estimated fair value of our future obligation for collecting and recycling the solar modules that we have sold when they have reached the end of their useful lives. We base our estimate of the fair value of our collection and recycling obligations on the present value of the expected future cost of collecting and recycling the solar modules, which includes the cost of packaging the solar modules for transport, the cost of freight from the solar module installation sites to a recycling center, the material, labor, and capital costs of the recycling process, and an estimated third-party profit margin and return on risk for collection and recycling services. We base this estimate on our experience collecting and recycling our solar modules and on our expectations about future developments in recycling technologies and processes, about economic conditions at the time the solar modules will be collected and recycled, and about the timing of when our solar modules will be returned for recycling. In the periods between the time of our sales and our settlement of the collection and recycling obligations, we accrete the carrying amount of the associated liability by applying the discount rate used for its initial measurement. At December 31, 2010, our estimate of the fair value of our liability for collecting and recycling solar modules was $133.0 million. A 10% decrease in our estimate of the future cost of collecting and recycling a solar module would reduce this estimated liability by $13.6 million, to $119.4 million; a 10% increase in our estimate of the future cost of collecting and recycling a solar module would increase this estimated liability by $13.6 million, to $146.6 million.
 
Product Warranties. We provide a limited warranty against defects in materials and workmanship under normal use and service conditions for five years following delivery to the owners of our solar modules. We also warrant to the owners of our solar modules that solar modules installed in accordance with agreed-upon specifications will produce at least 90% of their power output rating during the first 10 years following their installation and at least 80% of their power output rating during the following 15 years. In resolving claims under both the defects and power output warranties, we have the option of either repairing or replacing the covered solar module or, under the power output warranty, providing additional solar modules to remedy the power shortfall. Our warranties are automatically transferred from the original purchasers of our solar modules to subsequent purchasers. We accrue warranty costs when we recognize sales, using amounts estimated based on our historical experience with warranty claims, our monitoring of field installation sites, and in-house testing.
 
Accounting for Income Taxes. We are subject to the income tax laws of the United States, and its states and municipalities and those of the foreign jurisdictions in which we have significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes and must also make estimates about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. We regularly assess the likelihood of assessments in each of the taxing jurisdictions resulting from current and subsequent years' examinations, and we record tax liabilities as appropriate.
We establish liabilities for potential additional taxes that may arise out of tax audits in accordance with FASB Accounting Standards Codification Topic (ASC) 740, Income Taxes. Once established, we adjust the liabilities when additional information

42

 

becomes available or when an event occurs requiring an adjustment. Significant judgment is required in making these estimates and the actual cost of a legal claim, tax assessment, or regulatory fine or penalty may ultimately be materially different from our recorded liabilities, if any.
In preparing our consolidated financial statements, we calculate our income tax expense based on our interpretation of the tax laws in the various jurisdictions where we conduct business. This requires us to estimate our current tax obligations and the realizability of uncertain tax positions and to assess temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. These temporary differences result in deferred tax assets and liabilities, the net current amount of which we show as a component of current assets or current liabilities and the net noncurrent amount of which we show as other assets or other liabilities on our consolidated balance sheet.
 
We must also assess the likelihood that each of our deferred tax assets will be realized. To the extent we believe that realization of any of our deferred tax assets is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in a reporting period, we generally record a corresponding tax expense in our consolidated statement of operations. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally reduces our overall income tax expense.
 
We also consider the earnings of our foreign subsidiaries and determine whether such amounts are indefinitely reinvested outside the United States. We have concluded that, except for the decision to strategically repatriate approximately $300 million during 2010, all such accumulated earnings are currently indefinitely reinvested. Accordingly, no additional taxes have been accrued that might be incurred if such amounts were repatriated to the United States. If our intention to indefinitely reinvest the earnings of our foreign subsidiaries changes, additional taxes may be required to be accrued. See Note 19. "Income Taxes," to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
 
Goodwill. Goodwill represents the excess of the purchase price of the acquired businesses over the estimated fair value assigned to the identifiable assets acquired and liabilities assumed. We do not amortize goodwill, but instead test goodwill for impairment at least annually in the fourth quarter and, if necessary, we would record any impairment in accordance with ASC 350, Intangibles - Goodwill and Other. We will perform an impairment review between scheduled annual tests if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. In the process of our annual impairment review, we primarily use the income approach of valuation, which includes the discounted cash flow method, and the market approach of valuation, which considers values of comparable businesses, to estimate the fair value of our reporting units. Significant management judgment is required in the forecasts of future operating results and the discount rates that we used in the discounted cash flow method of valuation and in the selection of comparable businesses that we used in the market approach.
 
We reported $433.3 million of goodwill at December 31, 2010, which represents the excess of the purchase price over the fair value of the identifiable net tangible and intangible assets that we acquired from Turner Renewable Energy, LLC, OptiSolar Inc., and NextLight Renewable Power, LLC. ASC 350 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. Currently our operating segments and reporting units are identical. We determine the fair value for our reporting units referring to the price that would be received to sell the unit as whole in an orderly transaction between market participants at the measurement date. For the assessment of goodwill related to our systems business, we believe that a typical market participant for the sale of our systems reporting unit would be a solar module manufacturer seeking to acquire a systems business with a large pipeline of utility-scale solar power plant projects, with the intent that these projects would provide a captive outlet for additional future solar module production. Therefore, we model the systems reporting unit's future performance for purposes of applying the income method of fair value measurement to include some of the profitability associated with the solar module element of the solar power plants that it builds and sells.
 
We performed our goodwill impairment test in the fourth fiscal quarter of the years ended December 31, 2010 and December 26, 2009 and determined that the fair value of each of our individual reporting units substantially exceeded its carrying value. Therefore, we concluded that our goodwill was not impaired.
 
Results of Operations
 
The following table sets forth our consolidated statements of operations as a percentage of net sales for the years ended December 31, 2010, December 26, 2009, and December 27, 2008:

43

 

 
 
Years Ended
 
 
 
December 31,
2010
 
December 26,
2009
 
December 27,
2008
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
53.8
 %
 
49.4
 %
 
45.6
 %
Gross profit
 
46.2
 %
 
50.6
 %
 
54.4
 %
Research and development
 
3.7
 %
 
3.8
 %
 
2.7
 %
Selling, general and administrative
 
12.5
 %
 
13.2
 %
 
14.0
 %
Production start-up
 
0.8
 %
 
0.7
 %
 
2.6
 %
Operating income
 
29.2
 %
 
32.9
 %
 
35.1
 %
Foreign currency (loss) gain
 
(0.1
)%
 
0.3
 %
 
0.5
 %
Interest income
 
0.6
 %
 
0.5
 %
 
1.7
 %
Interest expense, net
 
 %
 
(0.3
)%
 
 %
Other income (expense), net
 
0.1
 %
 
(0.1
)%
 
(0.1
)%
Income tax expense
 
3.8
 %
 
2.2
 %
 
9.3
 %
Net income
 
26.0
 %
 
31.1
 %
 
27.9
 %
 
Fiscal Years Ended December 31, 2010 and December 26, 2009
 
Net Sales
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Net sales
 
$
2,563,515
 
 
$
2,066,200
 
 
$
497,315
 
 
24
%
 
The increase in net sales was primarily driven by strong demand from German customers in advance of further FiT reductions, an increase in revenue from our systems business, and an increase in production volume, resulting in a 28% increase in megawatts sold during 2010 compared with 2009. These increases were partially offset by a decrease in our module average selling price. The increase in megawatts sold was attributable to the full production ramp of our four-plant Malaysian manufacturing center in 2009, full production ramp of our Perrysburg, Ohio expansion in 2010, continued improvements to our manufacturing process and line throughput, and growth in our systems business. In addition, we increased the average conversion efficiency of our modules by approximately 3% during 2010 compared with 2009. Our module average selling price, excluding the impact of systems segment break-even reporting, decreased by approximately 10% during 2010 compared with 2009. The decline in our module average selling price was attributable to the following: a 5% decrease due to market price declines driven by FiT reductions in Europe, a 5% decrease due to annual contractual agreements, and a 2% decrease due to the weakening of the euro against the U.S. dollar exchange rate, partially offset by a 2% increase due to a shift in customer mix. Revenue recognized by our systems business during 2010 was $378.4 million and resulted primarily from the sale of utility-scale solar power systems in Europe and North America and from percentage-of-completion revenue recognition for utility-scale solar power systems in North America. During 2010 and 2009, 46% and 65%, respectively, of our net sales resulted from solar module sales to customers headquartered in Germany.
 
Cost of Sales
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Cost of sales
 
$
1,378,669
 
 
$
1,021,618
 
 
$
357,051
 
 
35
%
% of net sales
 
53.8
%
 
49.4
%
 
 
 
 
 
 
 
The increase in cost of sales was due to higher sales volumes, including an increase in the completion and sale of utility-scale solar power projects by our systems business, the full production ramp of our first four plants at our Malaysian manufacturing center in 2009, and the full production ramp of our Perrysburg, Ohio expansion in 2010. The increased production and sales volumes in our components business and increased volume sold through our systems business had the following effects: a $225.4 million increase in direct material expense, a $79.2 million increase in manufacturing overhead costs, an $18.0 million increase in sales freight, a $18.2 million increase in warranty expense, and a $16.3 million net increase in other costs.
 
The $79.2 million increase in manufacturing overhead costs for 2010 was due to a $32.9 million increase in salaries and

44

 

personnel-related expenses (including a $10.8 million increase in share-based compensation expense), a $17.0 million increase in depreciation and equipment expenses, a $2.0 million increase in facility related expenses, and a $27.3 million increase in incremental systems costs. Each of these manufacturing overhead cost increases primarily resulted from increased production capacity resulting from the full ramp of our Malaysian manufacturing center, expansion of our Perrysburg, Ohio plant, and ramp of our systems business.
 
The net increase in other costs for 2010 includes $23.7 million related to an increase in estimated expenses for certain module replacement efforts beyond normal warranty. During the period from June 2008 to June 2009, a manufacturing excursion occurred affecting less than 4% of the total product manufactured within the period. The excursion could result in possible premature power loss in the affected modules. The root cause was identified and subsequently mitigated in June 2009. On-going testing confirms that the corrective actions taken are effective. We have been working directly with impacted customers to replace the affected modules and these efforts are well underway and, in some cases, complete. Some of these efforts go beyond our normal warranty coverage. Accordingly, we accrued additional expenses of $30.8 million in 2010 and $37.9 million in total-to-date to cover the replacement of the anticipated affected module population in the field. Such amounts include $8.5 million in expenses accrued during the fourth fiscal quarter of 2010, reflecting updated best estimates of the total replacement costs, based on our field data and execution to date of the module replacement program.
 
Our average manufacturing cost per watt declined by $0.10 per watt, or 11%, from $0.87 in 2009 to $0.77 in 2010 and included $0.02 of non-cash stock based compensation.
 
Gross Profit
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Gross profit
 
$
1,184,846
 
 
$
1,044,582
 
 
$
140,264
 
 
13
%
% of net sales
 
46.2
%
 
50.6
%
 
 
 
 
 
 
 
Gross profit as a percentage of net sales decreased by 4.4 percentage points in 2010 compared with 2009. This decrease was attributable to the following: a 4.0 percentage point reduction due to a decline in our module average selling prices, a 3.9 percentage point reduction due to segment mix between our components and systems businesses, a 1.1 percentage point reduction relating to the manufacturing excursion discussed above under "Cost of sales," and a 0.6 percentage point reduction due to the weakening of the euro against the U.S. dollar exchange rate, partially offset by a 5.2 percentage point margin improvement attributable to continued manufacturing scale and reductions in our manufacturing cost per watt. We expect that gross profit will be impacted in future periods by the volatility of the exchange rate between the U.S. dollar and the euro and product mix between our components and systems businesses.
 
Research and Development
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Research and development
 
$
94,797
 
 
$
78,161
 
 
$
16,636
 
 
21
%
% of net sales
 
3.7
%
 
3.8
%
 
 
 
 
 
 
 
The increase in research and development expense was due to a $10.6 million increase in personnel-related expenses (including a $2.2 million increase in share-based compensation expense) resulting from increased headcount devoted to working on various projects to increase the efficiency of our modules at converting sunlight into electricity, and a $9.6 million increase in depreciation, testing, and qualification material costs, partially offset by a $3.6 million decrease in other expenses. During 2010, we continued the development of solar modules with increased efficiencies at converting sunlight into electricity and increased the conversion efficiency of our modules by approximately 3% compared with 2009.
 
Selling, General and Administrative
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Selling, general and administrative
 
$
321,704
 
 
$
272,898
 
 
$
48,806
 
 
18
%
% of net sales
 
12.5
%
 
13.2
%
 
 
 
 
 
 
 
The increase in selling, general and administrative expense was due to a $2.7 million increase in salaries and personnel-related

45

 

expenses due to growth (after giving effect to a $2.5 million decrease in share-based compensation expense due to one-time charges associated with our executive management team in 2009), a $17.6 million increase in expenses related to our systems business, a $14.8 million increase in facility and depreciation expenses, a $6.3 million increase in professional fees and expenses associated with the implementation of a new ERP system, and a $7.4 million increase in other expenses. Selling, general and administrative expense also included $5.3 million of other operating expenses related to impairment charges of certain project assets.
 
Production Start-Up
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Production start-up
 
$
19,442
 
 
$
13,908
 
 
$
5,534
 
 
40
%
% of net sales
 
0.8
%
 
0.7
%
 
 
 
 
 
 
 
During 2010, we incurred $19.4 million of production start-up expenses for our eight-line Malaysian, four-line German, one-line Perrysburg, Ohio, and two-line Blanquefort, France manufacturing expansions, including legal, regulatory, and personnel costs, compared with $13.9 million of production start-up expenses for our Malaysian and Perrysburg, Ohio manufacturing expansions during 2009. Production start-up expenses are composed of the cost of labor and material and depreciation expense to run and qualify the production lines, related facility expenses, management of our replication process, and legal and regulatory costs.
 
Foreign Currency (Loss) Gain
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Foreign currency (loss) gain
 
$
(3,468
)
 
$
5,207
 
 
$
(8,675
)
 
(167
)%
 
Foreign exchange gain decreased during 2010 compared with 2009 due to a increase in our foreign currency denominated assets and liabilities and volatility of the U.S. dollar relative to other currencies, in particular the euro.
 
Interest Income
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Interest income
 
$
14,375
 
 
$
9,735
 
 
$
4,640
 
 
48
%
 
Interest income increased during 2010 compared with 2009 primarily as a result of an increase in the average interest bearing cash and investment balances year over year and interest earned from notes receivable.
 
Interest Expense, Net
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Interest expense, net
 
$
(6
)
 
$
(5,258
)
 
$
5,252
 
 
(100
)%
 
Interest expense, net of amounts capitalized, decreased during 2010 compared with 2009, primarily as a result of higher amounts of interest expense capitalized during 2010. In addition, interest expense, net for 2009 included a $2.4 million expense related to the termination of the interest rate swaps for our German debt facility. We fully repaid this facility on June 30, 2009.
 
Other Income (Expense), Net
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Other income (expense), net
 
$
2,273
 
 
$
(2,985
)
 
$
5,258
 
 
(176
)%
 
Other income during 2010 primarily resulted from a realized gain associated with the sale of our equity investment in a related party, partially offset by other expenses. Other expense during 2009 primarily resulted from nonrecurring expenses associated with our credit default swaps.
 

46

 

Income Tax Expense
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2010
 
2009
 
Year Change
Income tax expense
 
$
97,876
 
 
$
46,176
 
 
$
51,700
 
 
112
%
Effective tax rate
 
12.8
%
 
6.7
%
 
 
 
 
 
 
 
Income tax expense increased by $51.7 million during 2010 compared with 2009. Of this increase, $13.8 million related to a one-time non-cash tax charge in connection with our decision to repatriate approximately $300 million of earnings from certain of our foreign subsidiaries prior to January 1, 2011, when recently enacted U.S. international tax legislation became effective. In addition, $11.5 million related to a one-time tax benefit recorded in 2009 in connection with the pull-forward of the Malaysian tax holiday from 2008. Substantially all of the remainder of the increase related to a $75.8 million increase in pre-tax income and a greater percentage of profits earned in higher tax jurisdictions. See Note 19. "Income Taxes," to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
 
Fiscal Years Ended December 26, 2009 and December 27, 2008
 
Net Sales
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Net sales
 
$
2,066,200
 
 
$
1,246,301
 
 
$
819,899
 
 
66
%
 
The increase in our net sales was primarily driven by price elasticity that resulted in strong demand for our solar modules as prices declined, resulting in a 114% increase in the megawatt volume of solar modules sold during 2009 compared with 2008, and from an increase in business activity associated with our systems segment business, partially offset by a decrease in our module average selling price. Revenue recognized for our systems business during 2009 was $115.0 million and resulted primarily from the sale of two utility scale solar power systems to utilities in the United States and Canada. The increase in megawatt volume of solar modules sold was attributable to the full production ramp of all four plants at our Malaysian manufacturing center, continued improvements to our manufacturing process and the growth in our systems business. In addition, we increased the average conversion efficiency by approximately 3% during 2009 compared with 2008. Our average selling price decreased by approximately 25% during 2009 compared with 2008. Approximately 20% of the decline in our average selling price was primarily due to competitive pressure, including the commencement of a customer rebate program in the third quarter of 2009. Additionally, our average selling price was adversely impacted by approximately 4% due to a decrease in the foreign exchange rate between the U.S. dollar and the euro and by approximately 1% due to a shift in customer mix. During 2009 and 2008, 65% and 74%, respectively, of our net sales resulted from sales of solar modules to customers headquartered in Germany.
 
Cost of Sales
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Cost of sales
 
$
1,021,618
 
 
$
567,908
 
 
$
453,710
 
 
80
%
% of net sales
 
49.4
%
 
45.6
%
 
 
 
 
 
 
 
The increase in our cost of sales was due to higher production and sales volumes, which resulted from the commencement of production at all of our four plants at our Malaysian manufacturing center, production ramp of our Perrysburg, Ohio expansion, and an increase in business activity associated with our systems segment business. The increased production and sales volumes in our components business and increased volume sold through our systems business had the following effects: a $278.7 million increase in direct material expense (including an $8.2 million amortization of project assets acquired through our OptiSolar acquisition), a $41.0 million increase in warranty expense and accruals for the estimated future costs associated with the collection and recycling of our solar modules due to increased sales, a $13.8 million increase in sales freight and other costs, and a $120.2 million increase in manufacturing overhead costs. The increase in manufacturing overhead costs was due to a $35.3 million increase in salaries and personnel related expenses (including a $4.9 million increase in share-based compensation expense), a $32.9 million increase in facility and related expenses and a $52.0 million increase in depreciation expense. Each of these manufacturing overhead cost increases primarily resulted from increased infrastructure associated with the build out of our Malaysian manufacturing center and start-up of our systems business. Our average manufacturing cost per watt declined by $0.21 per watt, or 19%, from $1.08 in 2008 to $0.87 in 2009 and included $0.01 of ramp penalty associated with the ramp and qualification of our Malaysian and Perrysburg manufacturing facilities and $0.01 of non-cash stock based compensation.

47

 

 
Gross Profit
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Gross profit
 
$
1,044,582
 
 
$
678,393
 
 
$
366,189
 
 
54
%
% of net sales
 
50.6
%
 
54.4
%
 
 
 
 
 
 
 
Gross profit as a percentage of net sales decreased by 3.8 percentage points in 2009 compared with 2008 due to a decline in our average selling prices by approximately 21 percentage points, partially offset by continued manufacturing cost per watt reduction of 19.4 percentage points. The decline in the exchange rate between the U.S. dollar and the euro adversely impacted our gross profit by 2.2 percentage points. We expect that gross profit will be impacted in future periods by the volatility of the exchange rate between the U.S. dollar and the euro and product mix between our components and systems businesses.
 
Research and Development
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Research and development
 
$
78,161
 
 
$
33,517
 
 
$
44,644
 
 
133
%
% of net sales
 
3.8
%
 
2.7
%
 
 
 
 
 
 
 
The increase in our research and development expense was due to a $14.2 million increase in personnel related expense (including a $2.3 million increase in share-based compensation expense) resulting from increased headcount. In addition, testing and qualification material costs increased by $18.0 million, consulting and other expenses increased by $11.5 million and grants received (an offset to our research and development expenses) decreased by $0.9 million during 2009 compared with 2008. During fiscal 2009, we continued the development of solar modules with increased efficiencies at converting sunlight into electricity and we increased the conversion efficiency of our modules by approximately 3% in comparison to fiscal 2008.
 
Selling, General and Administrative
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Selling, general and administrative
 
$
272,898
 
 
$
174,039
 
 
$
98,859
 
 
57
%
% of net sales
 
13.2
%
 
14.0
%
 
 
 
 
 
 
 
The increase in selling, general and administrative expense was due to a $66.0 million increase in salaries and personnel-related expenses (including a $23.0 million increase in share-based compensation expense, of which, $15.7 million were one-time charges associated with our executive management team). In addition, legal and professional service fees increased by $13.3 million; and other expenses increased by $19.6 million and included $6.9 million of one-time charges, of which $5.5 million of costs related to the acquisition, integration and operation of the solar power project development business of OptiSolar, which we acquired on April 3, 2009.
 
Production Start-Up
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Production start-up
 
$
13,908
 
 
$
32,498
 
 
$
(18,590
)
 
(57
)%
% of net sales
 
0.7
%
 
2.6
%
 
 
 
 
 
 
 
During 2009, we incurred $13.9 million of production start-up expenses for our Malaysian and Perrysburg manufacturing expansions, including legal, regulatory and personnel costs, compared with $32.5 million of production start-up expenses for our Malaysian manufacturing expansion during 2008. Production start-up expenses are composed of the cost of labor and material and depreciation expense to run and qualify the production lines, related facility expenses, management of our replication process and legal and regulatory costs.
 
Foreign Currency Gain

48

 

 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Foreign currency gain
 
$
5,207
 
 
$
5,722
 
 
$
(515
)
 
(9
)%
 
Foreign currency gain decreased primarily due to a decrease in our net foreign currency denominated assets and liabilities.
 
Interest income
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Interest income
 
$
9,735
 
 
$
21,158
 
 
$
(11,423
)
 
(54
)%
 
Interest income decreased primarily due to a substantial decline in interest rates.
 
Interest Expense, Net
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Interest expense, net
 
$
5,258
 
 
$
509
 
 
$
4,749
 
 
933
%
 
Interest expense, net of amounts capitalized, increased primarily due to lower amounts of interest expense capitalized during 2009. In addition, interest expense, net for 2009 includes a $2.4 million expense related to the termination of the interest rate swaps for our German debt facility. We fully repaid this facility on June 30, 2009.
 
Other Expense, Net
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Other expense, net
 
$
2,985
 
 
$
934
 
 
$
2,051
 
 
220
%
 
Other expense, net, increased primarily due to expenses associated with our credit default swaps, which expired in the second quarter of 2009.
 
Income Tax Expense
 
 
Years Ended
 
Year Over
(Dollars in thousands)
 
2009
 
2008
 
Year Change
Income tax expense
 
$
46,176
 
 
$
115,446
 
 
$
(69,270
)
 
(60
)%
Effective tax rate
 
6.7
%
 
24.9
%
 
 
 
 
 
 
 
Income tax expense decreased primarily due to the effect of our tax holiday in Malaysia. During 2009, a significant amount of our pre-tax income was generated in Malaysia where we have a 16.5 year tax holiday. In addition, we recognized an $11.5 million tax benefit during 2009 related to the reversal of 2008 Malaysian tax due to the pull-forward of the tax holiday to 2008, which was granted in 2009. See Note 19. "Income Taxes," to our consolidated financial statements included in this Annual Report on Form 10-K for more information.
 
Business Segment Review

49

 

 
Years Ended
 
Year/Year
 
Years Ended
 
Year/Year
(Dollars in thousands)
2010
 
2009
 
% Change
 
2009
 
2008
 
% Change
Net sales
 
 
 
 
 
 
 
 
 
 
 
Components
$
2,185,165
 
 
$
1,965,437
 
 
11
%
 
$
1,965,437
 
 
$
1,195,803
 
 
64
%
Systems
378,350
 
 
100,763
 
 
275
%
 
100,763
 
 
50,498
 
 
100
%
Total
$
2,563,515
 
 
$
2,066,200
 
 
24
%
 
$
2,066,200
 
 
$
1,246,301
 
 
66
%
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes (Segment profit)
 
 
 
 
 
 
 
 
Components
$
762,077
 
 
$
686,314
 
 
11
%
 
$
686,314
 
 
$
463,776
 
 
48
%
Systems
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
762,077
 
 
$
686,314
 
 
11
%
 
$
686,314
 
 
$
463,776
 
 
48
%
 
Our Chief Operating Decision Maker, consisting of senior executive staff, views the sale of solar modules from the components segment as the core driver of our profitability, return on net assets, and cash throughput; and as a result, we view our systems segment as an enabler to drive module throughput. Therefore, we operate our systems segment with the objective to achieve break-even results before income taxes. We include the sale of our solar modules manufactured by the components segment and installed in projects sold by our systems segment in “net sales” of our components business. See Note 23. "Segment and Geographical Information," to our consolidated financial statements included in this Annual Report on Form 10-K for more information.
 
Components Segment
 
 
Years Ended
 
Year/Year
 
Years Ended
 
Year/Year
(Dollars in thousands)
2010
 
2009
 
% Change
 
2009
 
2008
 
% Change
Net sales
$
2,185,165
 
 
$
1,965,437
 
 
11
%