XMEX:FSLR First Solar Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

Form 10-Q

(Mark one)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2012
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from            to

Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-4623678
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

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

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

As of July 27, 2012, 86,969,614 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.
 




FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

TABLE OF CONTENTS
 
 
Page
Part I.
Financial Information (Unaudited)
 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and June 30, 2011
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and June 30, 2011
 
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signature
 





PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Net sales
 
$
957,332

 
$
532,774

 
$
1,454,387

 
$
1,100,067

Cost of sales
 
713,591

 
337,976

 
1,133,901

 
645,604

Gross profit
 
243,741

 
194,798

 
320,486

 
454,463

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
32,365

 
33,102

 
68,449

 
64,453

Selling, general and administrative
 
52,184

 
86,872

 
144,004

 
173,872

Production start-up
 
533

 
10,294

 
4,591

 
22,225

Restructuring
 
19,000

 

 
420,065

 

Total operating expenses
 
104,082

 
130,268

 
637,109

 
260,550

Operating income (loss)
 
139,659

 
64,530

 
(316,623
)
 
193,913

Foreign currency gain
 
1,015

 
1,659

 
31

 
2,609

Interest income
 
3,379

 
3,417

 
6,290

 
6,440

Interest expense, net
 
(7,372
)
 

 
(8,292
)
 

Other income (expense), net
 
(1,334
)
 
2,351

 
(2,545
)
 
2,002

Income (loss) before income taxes
 
135,347

 
71,957

 
(321,139
)
 
204,964

Income tax expense
 
24,364

 
10,819

 
17,294

 
27,858

Net income (loss)
 
$
110,983

 
$
61,138

 
$
(338,433
)
 
$
177,106

Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.28

 
$
0.71

 
$
(3.90
)
 
$
2.07

Diluted
 
$
1.27

 
$
0.70

 
$
(3.90
)
 
$
2.03

Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
86,855

 
86,164

 
86,681

 
85,746

Diluted
 
87,653

 
87,126

 
86,681

 
87,092


See accompanying notes to these condensed consolidated financial statements.

3



FIRST SOLAR, INC. AND SUBSIDIARIES

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

 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Net income (loss)
 
$
110,983

 
$
61,138

 
$
(338,433
)
 
$
177,106

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(9,795
)
 
6,794

 
3,714

 
30,589

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

 
(3,971
)
 
8,562

 
(11,474
)
Unrealized gain (loss) on derivative instruments
 
2,585

 
8,931

 
(12,715
)
 
(31,519
)
Other comprehensive income (loss), net of tax
 
5,416

 
11,754

 
(439
)
 
(12,404
)
Comprehensive income (loss)
 
$
116,399

 
$
72,892

 
$
(338,872
)
 
$
164,702


See accompanying notes to these condensed consolidated financial statements.

4



FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
630,240

 
$
605,619

Marketable securities
 
113,453

 
66,146

Accounts receivable trade, net
 
143,670

 
310,568

Accounts receivable, unbilled
 
436,170

 
533,399

Inventories
 
580,737

 
475,867

Balance of systems parts
 
152,658

 
53,784

Deferred project costs
 
189,721

 
197,702

Deferred tax assets, net 
 
31,386

 
41,144

Assets held for sale
 
49,521

 

Prepaid expenses and other current assets
 
136,868

 
329,032

Total current assets
 
2,464,424

 
2,613,261

Property, plant and equipment, net
 
1,567,367

 
1,815,958

Project assets 
 
160,239

 
374,881

Deferred project costs
 
259,996

 
122,688

Note receivable, affiliate
 
21,373

 

Deferred tax assets, net 
 
341,012

 
340,274

Marketable securities 
 

 
116,192

Restricted cash and investments 
 
267,411

 
200,550

Goodwill
 
65,444

 
65,444

Inventories 
 
137,939

 
60,751

Other assets 
 
202,129

 
67,615

Total assets
 
$
5,487,334

 
$
5,777,614

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
194,554

 
$
176,448

Income taxes payable
 
9,175

 
9,541

Accrued expenses
 
476,817

 
406,659

Current portion of long-term debt
 
47,768

 
44,505

Deferred revenue
 
195,418

 
41,925

Other current liabilities
 
38,533

 
294,646

Total current liabilities
 
962,265

 
973,724

Accrued solar module collection and recycling liability
 
185,324

 
167,378

Long-term debt
 
471,083

 
619,143

Other liabilities
 
507,223

 
373,506

Total liabilities
 
2,125,895

 
2,133,751

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 86,961,313 and 86,467,873 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
 
87

 
86

Additional paid-in capital
 
2,079,191

 
2,022,743

Accumulated earnings
 
1,287,638

 
1,626,071

Accumulated other comprehensive loss
 
(5,477
)
 
(5,037
)
Total stockholders’ equity
 
3,361,439

 
3,643,863

Total liabilities and stockholders’ equity
 
$
5,487,334

 
$
5,777,614


See accompanying notes to these condensed consolidated financial statements.

5



FIRST SOLAR, INC. AND SUBSIDIARIES

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

 
 
Six Months Ended
 
 
 
June 30,
2012
 
June 30,
2011
Cash flows from operating activities:
 
 
 
 
Cash received from customers
 
$
1,639,136

 
$
798,159

Cash paid to suppliers and associates
 
(1,169,399
)
 
(1,005,181
)
Interest received
 
2,970

 
6,742

Interest paid
 
(18,030
)
 
(3,119
)
Income tax refunds (payments), net
 
25,561

 
(25,643
)
Excess tax benefit from share-based compensation arrangements
 
(66,853
)
 
(16,497
)
Other operating activities
 
(1,050
)
 
(1,296
)
Net cash provided by (used in) operating activities
 
412,335

 
(246,835
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(281,972
)
 
(389,966
)
Purchases of marketable securities and investments
 
(14,446
)
 
(189,735
)
Proceeds from sales and maturities of marketable securities and investments
 
83,367

 
377,691

Investment in note receivable, affiliate
 
(21,883
)
 

Purchase of restricted investments
 
(80,667
)
 
(62,748
)
Release of (increase in) restricted cash
 
21,547

 
(23,328
)
Acquisitions, net of cash acquired
 
(2,437
)
 
(21,105
)
Other investing activities
 
(4,812
)
 
214

Net cash used in investing activities
 
(301,303
)
 
(308,977
)
Cash flows from financing activities:
 
 
 
 
Proceeds from stock option exercises
 
70

 
7,651

Repayments of borrowings under revolving credit facility
 
(575,000
)
 

Proceeds from borrowings under revolving credit facility
 
590,000

 

Repayments of long-term debt
 
(160,296
)
 
(114,342
)
Proceeds from borrowings under long-term debt, net of discount and issuance costs
 

 
224,442

Excess tax benefit from share-based compensation arrangements
 
66,853

 
16,497

(Repayment of) proceeds from economic development funding
 
(6,820
)
 
3,112

Other financing activities
 
(713
)
 
(236
)
Net cash (used in) provided by financing activities
 
(85,906
)
 
137,124

Effect of exchange rate changes on cash and cash equivalents
 
(505
)
 
10,476

Net increase (decrease) in cash and cash equivalents
 
24,621

 
(408,212
)
Cash and cash equivalents, beginning of the period
 
605,619

 
765,689

Cash and cash equivalents, end of the period
 
$
630,240

 
$
357,477

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
61,615

 
$
109,685


 See accompanying notes to these condensed consolidated financial statements.

6



FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or for any other period. The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the SEC.

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

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

Note 2. Summary of Significant Accounting Policies
  
Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Significant estimates in these condensed consolidated financial statements include revenue recognition, allowances for doubtful accounts receivable, inventory valuation, estimates of future cash flows from and the economic useful lives of long-lived assets, asset impairments, certain accrued liabilities, income taxes and tax valuation allowances, reportable segment allocations, accrued warranty and related expense, accrued collection and recycling expense, and fair value estimates. Despite our intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from these estimates and assumptions.

Product Warranties. We provide a limited warranty against defects in materials and workmanship under normal use and service conditions for 10 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. We also have the option to make a payment for the then current market module price to resolve claims. Our warranties are automatically transferred from the original purchasers of our solar modules to subsequent purchasers upon resale.

In addition to our solar module warranty described above, for solar power plants built by our systems business, we typically provide a limited warranty on the balance of the system against defects in engineering design, installation and, workmanship for a period of one to two years following the substantial completion of a phase or the entire solar power plant. In resolving claims under the engineering design, installation and, workmanship warranties, we have the option of remedying the defect through repair, refurbishment, or replacement.

When we recognize revenue for module or systems project sales, we accrue a liability for the estimated future costs of meeting our limited warranty obligations. We make and revise these estimates based primarily on the number of our solar modules under warranty installed at customer locations, our historical experience with warranty claims, our monitoring of field installation sites, our internal testing of and the expected future performance of our solar modules and balance of the systems, and our estimated per-module replacement cost.

Revenue Recognition — Systems Business. We recognize revenue for arrangements entered into by our systems business generally using two revenue recognition models, following the guidance in ASC 605, Accounting for Long-term Construction

7



Contracts or, for arrangements which include land or land rights, ASC 360, Accounting for Sales of Real Estate.

For construction contracts that do not include land or land rights and thus are accounted for under ASC 605, we use the percentage-of-completion method using actual costs incurred over total estimated costs to complete a project (including module costs) as our standard accounting policy, unless we cannot make reasonably dependable estimates of the costs to complete the contract, in which case we would use the completed contract method. We periodically revise our contract cost and profit estimates and we immediately recognize any losses that we identify on such contracts. Incurred costs include all installed direct materials, installed solar modules, labor, subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, and tools. We recognize direct material and solar module costs as incurred costs when the direct materials and solar modules have been installed in the project. When construction contracts or other agreements specify that title to direct materials and solar modules transfers to the customer before installation has been performed, we defer revenue and associated costs and recognize revenue once those materials are installed and have met all other revenue recognition requirements. We consider direct materials and solar modules to be installed when they are permanently attached or fitted to the solar power systems as required by engineering designs. Solar modules used in our solar power systems, which we still hold title to, remain within inventory until such modules are installed in a solar power system.

For arrangements recognized under ASC 360 (typically when we have gained control of land or land rights), we record the sale as revenue using one of the following revenue recognition methods, based upon the substance and form of the terms and conditions of such arrangements:

(i) We apply the percentage-of-completion method to certain arrangements covered under ASC 360, when a sale has been consummated, we have transferred the usual risks and rewards of ownership to the buyer, the initial and continuing investment criteria have been met, we have the ability to estimate our costs and progress toward completion, and all other revenue recognition criteria have been met. The initial and continuing investment requirements, which demonstrates a buyer’s commitment to honor their obligations for the sales arrangement, can be met through the receipt of cash or an irrevocable letter of credit from a highly credit worthy lending institution.

(ii) Depending on the value of the initial payments and continuing payments commitment by the buyer, and whether collectability from the buyer is reasonably assured, we may align our revenue recognition and release of project assets or deferred project costs to cost of sales with the receipt of payment from the buyer.

(iii) We may also record revenue for certain arrangements after construction of a project is substantially complete, we have transferred the usual risks and rewards of ownership to the buyer, and we have received payment from the buyer.

Inventories. We report our inventories at the lower of cost or market. We determine cost on a first-in, first-out basis and include both the costs of acquisition and the costs of manufacturing in our inventory costs. These costs include direct material, direct labor, and indirect manufacturing costs, including depreciation and amortization. Our capitalization of costs into inventory is based on normal utilization of our plants. If production capacity is abnormally underutilized, the portion of our indirect manufacturing costs related to the abnormal underutilization levels is expensed as incurred.

We regularly review the cost of inventory against its estimated market value and record a lower of cost or market write-down if any inventories have a cost in excess of their estimated market value. We also regularly evaluate the quantities and values of our inventories in light of current market conditions and market trends and record write-downs for any quantities in excess of demand and for any product obsolescence. This evaluation considers historical usage, expected demand, anticipated sales price, desired strategic raw material requirements, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability, use of modules in our systems business and other factors.

Long-Lived Assets. We account for any impairment of our long-lived tangible assets and definite-lived intangible assets in accordance with ASC 360, Property, Plant and Equipment. As a result, we assess long-lived assets classified as “held and used,” including our property, plant and equipment, for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of our long-lived assets may not be recoverable. These events and changes can include significant current period operating or cash flow losses associated with the use of a long-lived asset, or group of assets, combined with a history of such losses, significant changes in the manner of use of assets, and current expectations that, it is more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Idle Property, Plant and Equipment. For property, plant and equipment that is placed into service, but subsequently idled temporarily, we continue to record depreciation expense over the remaining estimated useful life of the idled property, plant and equipment.

8




Retainage. Certain of the engineering, procurement, and construction (“EPC”) contracts for solar power plants we build contain retainage provisions. Retainage refers to the portion of the contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. We consider whether collectability of such retainage is reasonably assured in connection with our overall assessment of the collectability of amounts due or that will become due under our EPC contracts. Retainage expected to be collected within 12 months is classified within accounts receivable, unbilled on the condensed consolidated balance sheet. Retainage expected to be collected after 12 months is classified within other assets on the condensed consolidated balance sheet. After we have met the EPC contract requirements to bill for retainage, we will reclassify such amounts to accounts receivable trade.
 
Refer to Note 2. “Summary of Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 for a complete discussion of our significant accounting policies.

Note 3. Recent Accounting Pronouncements

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

Note 4. Restructuring

December 2011 Restructuring

In December 2011, executive management approved a set of restructuring initiatives intended to accelerate operating cost reductions and improve overall operating efficiency. In connection with these restructuring initiatives, we incurred total charges to operating expense of $60.4 million in the fourth quarter of 2011 and $0.3 million in the first half of 2012. These charges consisted primarily of (i) $52.4 million of asset impairment and asset impairment related charges due to a significant reduction in certain research and development activities that had been focused on an alternative photovoltaic (“PV”) product, and (ii) $8.3 million in severance benefits to terminated employees as described below, most of which is expected to be paid out by the end of 2012.

We have refocused our research and development center in Santa Clara, California on the development of advanced cadmium telluride (“CdTe”) PV technologies, compared to a broader research and development effort prior to December 2011. We eliminated approximately 100 positions company-wide as part of the restructuring initiatives. The related long-lived assets were considered abandoned for accounting purposes and were impaired to their estimated salvage value as of December 31, 2011.

The following table summarizes the balance at December 31, 2011, the activity during the three and six months ended June 30, 2012, and the balance at June 30, 2012 (in thousands):
December 2011 Restructuring
 
Asset Impairments
 
Asset Impairment Related Costs
 
Severance and Termination Related Costs
 
Total
Ending Balance at December 31, 2011
 
$

 
$
2,346

 
$
6,807

 
$
9,153

Charges to Income
 

 

 
1,216

 
1,216

Change in Estimates
 

 

 

 

Cash Payments
 

 
(158
)
 
(3,905
)
 
(4,063
)
Non-Cash Amounts
 

 

 
(166
)
 
(166
)
Ending Balance at March 31, 2012
 

 
2,188

 
3,952

 
6,140

Charges to Income
 
747

 

 
264

 
1,011

Change in Estimates
 

 
(1,933
)
 

 
(1,933
)
Cash Payments
 

 

 
(1,649
)
 
(1,649
)
Non-Cash Amounts
 
(747
)
 

 
(264
)
 
(1,011
)
Ending Balance at June 30, 2012
 
$

 
$
255

 
$
2,303

 
$
2,558


9




Expenses recognized for the above restructuring activities are presented in “Restructuring” on the condensed consolidated statements of operations. Substantially all expenses related to the December 2011 restructuring were related to our components segment. We do not expect to incur additional expense related to such restructuring initiatives.

February 2012 Manufacturing Restructuring

In February 2012, executive management completed an evaluation of and approved a set of manufacturing capacity and other initiatives primarily intended to adjust our previously planned manufacturing capacity expansions and global manufacturing footprint. The primary goal of these initiatives was to better align production capacity and geographic location of such capacity with expected geographic market requirements and demand. In connection with these initiatives, we incurred total charges to operating expense of $131.6 million during the six months ended June 30, 2012. These charges consist primarily of (i) $99.3 million of asset impairment and asset impairment related charges due to our decision not to proceed with our 4-line manufacturing plant under construction in Vietnam, (ii) $25.3 million of asset impairment and asset impairment related charges due to our decision to cease the use of certain manufacturing machinery and equipment intended for use in the production of certain components of our solar modules, and (iii) $7.0 million of asset impairment and asset impairment related charges primarily due to our decision to cease use of certain other long-lived assets.

Based upon expected future market demand and our focus on providing utility-scale PV generation solutions primarily to sustainable geographic markets, we decided not to proceed with our previously announced 4-line plant in Vietnam. As of March 31, 2012, the plant was considered “held for sale”, and a corresponding impairment charge of $92.2 million was recorded. The carrying amount of the Vietnam plant as of June 30, 2012 was $45.9 million and is classified as assets held for sale in the condensed consolidated balance sheet. The carrying amount of the Vietnam plant represents the fair value of the plant less expected costs to sell, with fair value being determined based upon a weighted approach using both the cost and income methods of valuation using market participant assumptions based primarily on observable inputs. Such fair value measurements are considered Level 2 measurements within the fair value hierarchy.

We evaluated the asset group that included our manufacturing plant under construction in Vietnam, which was considered “held and used”, for potential impairment as of December 31, 2011 in accordance with ASC 360. In performing the recoverability test, we concluded that the long-lived asset group was recoverable after comparing the undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the total asset groups carrying value.

Additionally, certain manufacturing machinery and equipment intended for use in the production of certain components of our solar modules and certain other long-lived assets were considered abandoned for accounting purposes in February 2012. As a result, we recorded an impairment charge in the six months ended June 30, 2012 of $29.2 million.

The following table summarizes the February 2012 manufacturing restructuring amounts recorded during the three and six months ended June 30, 2012 and the remaining balance at June 30, 2012 (in thousands):
February 2012 Manufacturing Restructuring
 
Asset Impairments
 
Asset Impairment Related Costs
 
Total
Charges to Income
 
$
121,190

 
$
8,265

 
$
129,455

Changes in Estimates
 

 

 

Cash Payments
 

 

 

Non-Cash Amounts
 
(121,190
)
 
$
(2,877
)
 
(124,067
)
Ending Balance at March 31, 2012
 

 
5,388

 
5,388

Charges to Income
 
1,575

 
214

 
1,789

Changes in Estimates
 
519

 
(128
)
 
391

Cash Payments
 

 
(172
)
 
(172
)
Non-Cash Amounts
 
(2,094
)
 
235

 
(1,859
)
Ending Balance at June 30, 2012
 
$

 
$
5,537

 
$
5,537


Expenses recognized for the restructuring activities above are presented in “Restructuring” on the condensed consolidated statements of operations. All expenses related to the February 2012 manufacturing restructuring were related to our components segment. We do not expect to incur any additional expense for the above restructuring initiatives.


10



April 2012 European Restructuring

In April 2012, executive management approved a set of restructuring initiatives intended to align the organization with our Long Term Strategic Plan including expected sustainable market opportunities and to reduce costs. As part of these initiatives, we will substantially reduce our European operations including the closure of our manufacturing operations in Frankfurt (Oder), Germany by the end of 2012. Due to the lack of policy support for utility-scale solar projects in Europe, we do not believe there is a business case for continuing manufacturing operations in Germany. Additionally, we will substantially reduce the size of our operations in Mainz, Germany and elsewhere in Europe. We also indefinitely idled the capacity of four production lines at our manufacturing center in Kulim, Malaysia in May 2012. These actions, combined with additional reductions in administrative and other staff in North America, will reduce First Solar’s workforce by approximately 2,000 associates.

The restructuring and related initiatives resulted in total charges of $288.1 million in the six months ended June 30, 2012, including: (i) $230.5 million in asset impairments and asset impairment related charges, primarily related to the Frankfurt (Oder) plants; (ii) $27.3 million in severance and termination related costs; and (iii) $30.3 million for the required repayment of German government grants related to the second Frankfurt (Oder) plant.

Based primarily upon expected future market demand and the lack of policy support for utility-scale solar projects in Europe, we do not believe there is a business case for continuing manufacturing operations in Germany. We concluded that an impairment indicator existed as of March 31, 2012 related to our asset group that includes our manufacturing operations in Germany as it was considered more-likely-than-not that operations for such asset group would be closed, and accordingly we performed a recoverability test in accordance with ASC 360. In performing the recoverability test, we concluded that the long-lived asset group was not recoverable after comparing the undiscounted future cash flows based on our own expected use and eventual disposition of the asset group at market value, to the asset group’s carrying value. Such recoverability test included future cash flow assumptions that contemplated the potential closure of our manufacturing operations in Germany at the end of 2012.

As the asset group was not considered recoverable, we determined the fair value of the long-lived assets in the asset group in accordance with ASC 360 and ASC 820 based primarily on the cost method of valuation for the personal property and a weighted income method of valuation for the real property. Such fair value measurements for the personal and real property are considered Level 3 and Level 2 fair value measurements in the fair value hierarchy, respectively. We recorded an impairment charge of $225.0 million primarily related to the long-lived assets at our Frankfurt (Oder) plant. As the long-lived assets for our Frankfurt (Oder) plant are considered held and used under ASC 360, we continue to record depreciation expense over the estimated useful life of such assets using the new cost basis.

The following table summarizes the April 2012 European restructuring amounts recorded during the three and six months ended June 30, 2012 and the remaining balance at June 30, 2012 (in thousands):
April 2012 Restructuring
 
Asset Impairments
 
Asset Impairment Related Costs
 
Severance and Termination Related Costs
 
Grant Repayments
 
Total
Charges to Income
 
$
224,226

 
$
5,844

 
$
10,502

 
$
29,822

 
$
270,394

Change in Estimates
 

 

 

 

 

Cash Payments
 

 

 

 

 

Non-Cash Amounts
 
(224,226
)
 

 

 
(14,693
)
 
(238,919
)
Ending Balance at March 31, 2012
 

 
5,844

 
10,502

 
15,129

 
31,475

Charges to Income
 
766

 

 
16,812

 
452

 
18,030

Change in Estimates
 

 
(289
)
 

 

 
(289
)
Cash Payments
 

 

 
(5,877
)
 
(7,044
)
 
(12,921
)
Non-Cash Amounts
 
(766
)
 

 

 

 
(766
)
Ending Balance at June 30, 2012
 
$

 
$
5,555

 
$
21,437

 
$
8,537

 
35,529


Expenses recognized for the restructuring activities are presented in “Restructuring” on the condensed consolidated statements of operations. Substantially all expenses related to the April 2012 restructuring were related to our components segment. We expect to incur between $40 million and $60 million in additional restructuring expense through the second quarter of 2013 primarily related to remaining severance and termination related costs and asset impairment related costs associated with such restructuring initiatives.

Note 5. Acquisitions

11




2011 Acquisition

Ray Tracker

On January 4, 2011, we acquired 100% of the ownership interest of Ray Tracker, Inc. (“Ray Tracker”), a tracking technology and PV balance of systems parts business in an all-cash transaction, which was not material to our condensed consolidated balance sheets and results of operations. We have included the financial results of Ray Tracker in our condensed consolidated financial statements from the date of acquisition.

Note 6. Goodwill

The changes in the carrying amount of goodwill, which is generally deductible for tax purposes, for our components and systems reporting units for the six months ended June 30, 2012 were as follows (in thousands):
 
 
Components
 
Systems
 
Consolidated
Ending balance, December 31, 2011
 
$

 
$
65,444

 
$
65,444

Ending balance, June 30, 2012
 
$

 
$
65,444

 
$
65,444


Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and liabilities assumed. We do not amortize goodwill, but instead are required to test goodwill for impairment in accordance with ASC 350, Intangibles - Goodwill and Other, at least annually and, if necessary, we would record an impairment based on the results of any such impairment test. We will perform an impairment test 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 performing a goodwill impairment test under ASC 350, we may first make a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value to determine whether it is necessary to perform a two-step goodwill impairment test. If it is determined through the qualitative assessment that a reporting unit’s fair value is more-likely-than-not greater than its carrying value, the two-step impairment test is not required. If the qualitative assessment indicates it is more-likely-than-not that a reporting unit’s fair value is not greater than its carrying value, we must perform the two-step impairment test. We may also elect to proceed directly to the two-step impairment test without considering such qualitative factors.

During the fourth quarter of 2011, we commenced our annual goodwill impairment test for 2011 and after considering qualitative factors including the continuing reduction in our market capitalization during December 2011 and our new business strategy and 2012 outlook announced in December 2011, we concluded that a two-step goodwill impairment test was required for both of our reporting units.

In performing the first step of the two-step goodwill impairment test, we determined that the fair value of our systems reporting unit exceeded the carrying value by a significant amount indicating no impairment was necessary for the systems reporting unit in the fourth quarter of 2011.

We also performed the first and second steps of the two-step goodwill impairment test for the components reporting unit and determined that the implied fair value of goodwill in the components reporting unit was zero. As a result, we impaired all of the goodwill in the components reporting unit in the fourth quarter of 2011. As of December 31, 2011 and June 30, 2012, our gross goodwill and accumulated goodwill impairment losses were $393.4 million for our components reporting unit.

As of June 30, 2012, we made an assessment of whether it was more-likely-than-not that the systems reporting unit’s fair value was less than its carrying value to determine whether an interim goodwill impairment test should be performed. The events and circumstances that we considered in this assessment included our restructuring activities and the recent declines in our stock price. We expect our restructuring activities to primarily impact the components reporting unit with very little unfavorable impact to the operating results or cash flows of our systems reporting unit. We also considered the decline in our stock price and related market capitalization since our last goodwill impairment test. Our assessment of whether an interim impairment test should be performed in the second quarter of 2012 also considered that the first step of our last goodwill impairment test indicated the fair value of our systems reporting unit exceeded the carrying value by a significant amount. Other factors that we considered included the fact that our forecasted cash inflows related to our systems business project pipeline and related contract pricing had not changed significantly since our last impairment test. Based upon the weight of the positive, negative and neutral qualitative factors, we concluded it was not more-likely-than-not that the fair value of our systems reporting unit was less than its carrying value and

12



as a result, an interim goodwill impairment test was not required as of June 30, 2012.

Note 7. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
 
June 30,
2012
 
December 31,
2011
Cash:
 
 
 
 
Cash
 
$
629,263

 
$
579,241

Cash equivalents:
 
 
 
 
Money market mutual funds
 
977

 
26,378

Total cash and cash equivalents
 
630,240

 
605,619

Marketable securities:
 
  
 
 
Commercial paper
 
2,500

 
9,193

Corporate debt securities
 
29,004

 
55,011

Federal agency debt
 
34,552

 
50,081

Foreign agency debt
 
5,836

 
10,928

Foreign government obligations
 
5,193

 
9,120

Supranational debt
 
34,360

 
45,991

U.S. government obligations
 
2,008

 
2,014

Total marketable securities
 
113,453

 
182,338

Total cash, cash equivalents, and marketable securities
 
$
743,693

 
$
787,957


We have classified our marketable securities as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as a part of other comprehensive income. We report realized gains and losses on the sale of our marketable securities in earnings, computed using the specific identification method. We may sell these securities prior to their stated maturities after consideration of our liquidity requirements. At June 30, 2012, as we view securities with maturities greater than 12 months as available to support current operations, we classify such securities as current assets under the caption marketable securities in the accompanying condensed consolidated balance sheet. During the three and six months ended June 30, 2012, we realized an immaterial amount of gains and an immaterial amount of losses on our marketable securities. During the three and six months ended June 30, 2011, we realized $0.8 million and $0.9 million, respectively, of gains and an immaterial amount of losses on our marketable securities. See Note 11. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the fair value of our marketable securities.
 
All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable security to be impaired when its fair value is less than its cost, in which case we would further review the marketable security to determine whether it is other-than-temporarily impaired. When we evaluate a marketable security for other-than-temporary impairment, we review factors such as the length of time and extent to which its fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more-likely-than-not that we will be required to sell the marketable security before we have recovered its cost basis. If a marketable security were other-than-temporarily impaired, we would write it down through earnings to its impaired value and establish that as a new cost basis. We did not identify any of our marketable securities as other-than-temporarily impaired at June 30, 2012 and December 31, 2011.

The following tables summarize the unrealized gains and losses related to our marketable securities, by major security type, as of June 30, 2012 and December 31, 2011 (in thousands):

13



 
 
As of June 30, 2012
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper
 
$
2,499

 
$
1

 
$

  
$
2,500

Corporate debt securities
 
29,004

 
21

 
21

  
29,004

Federal agency debt
 
34,503

 
49

 

  
34,552

Foreign agency debt
 
6,008

 

 
172

  
5,836

Foreign government obligations
 
5,189

 
4

 

  
5,193

Supranational debt
 
34,384

 
9

 
33

  
34,360

U.S. government obligations
 
1,999

 
9

 

 
2,008

Total
 
$
113,586

  
$
93

  
$
226

  
$
113,453


 
 
As of December 31, 2011
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper
 
$
9,192

 
$
1

 
$

  
$
9,193

Corporate debt securities
 
55,150

 
13

 
152

  
55,011

Federal agency debt
 
50,035

 
54

 
8

  
50,081

Foreign agency debt
 
11,473

 

 
545

  
10,928

Foreign government obligations
 
9,128

 
1

 
9

  
9,120

Supranational debt
 
46,380

 

 
389

  
45,991

U.S. government obligations
 
1,999

 
15

 

 
2,014

Total
 
$
183,357

  
$
84

  
$
1,103

  
$
182,338


Contractual maturities of our marketable securities as of June 30, 2012 and December 31, 2011 were as follows (in thousands):
 
 
As of June 30, 2012
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
78,113

 
$
41

 
$
226

 
$
77,928

One year to two years
 
33,540

 
41

 

 
33,581

Two years to three years
 
1,933

 
11

 

 
1,944

Total
 
$
113,586

 
$
93

 
$
226

 
$
113,453


 
 
As of December 31, 2011
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
66,146

 
$
30

 
$
30

 
$
66,146

One year to two years
 
97,538

 
54

 
854

 
96,738

Two years to three years
 
19,673

 

 
219

 
19,454

Total
 
$
183,357

 
$
84

 
$
1,103

 
$
182,338


The net unrealized loss of $0.1 million and $1.0 million as of June 30, 2012 and December 31, 2011, respectively, on our marketable securities were primarily the result of changes in interest rates. Our investment policy requires investments to be highly rated and limits the security types, issuer concentration, and duration to maturity of our marketable securities.

The following table shows gross unrealized losses and estimated fair values for those marketable securities and investments that were in an unrealized loss position as of June 30, 2012 and December 31, 2011, aggregated by major security type and the length of time the marketable securities have been in a continuous loss position (in thousands):

14



 
 
As of June 30, 2012
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Corporate debt securities
 
$
18,421

 
$
21

 
$

 
$

 
$
18,421

 
$
21

Foreign agency debt
 
5,836

 
172

 

 

 
5,836

 
172

Supranational debt
 
15,156

 
33

 

 

 
15,156

 
33

Total
 
$
39,413

 
$
226

 
$

 
$

 
$
39,413

 
$
226


 
 
As of December 31, 2011
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Corporate debt securities
 
$
47,763

 
$
152

 
$

 
$

 
$
47,763

 
$
152

Federal agency debt
 
6,744

 
8

 

 

 
6,744

 
8

Foreign agency debt
 
8,176

 
545

 

 

 
8,176

 
545

Foreign government obligations
 
6,361

 
9

 

 

 
6,361

 
9

Supranational debt
 
45,991

 
389

 

 

 
45,991

 
389

Total
 
$
115,035

 
$
1,103

 
$

 
$

 
$
115,035

 
$
1,103


Note 8. Restricted Cash and Investments

Restricted cash and investments consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
 
June 30,
2012
 
December 31,
2011
Restricted cash
 
$
172

 
$
21,735

Restricted investments
 
267,239

 
178,815

Restricted cash and investments 
 
$
267,411

 
$
200,550


On May 18, 2011, in connection with the plant expansion at our German manufacturing center, First Solar Manufacturing GmbH (“FSM GmbH”), our indirect wholly owned subsidiary, entered into a credit facility agreement (“German Facility Agreement”), as discussed in Note 14. “Debt,” to these condensed consolidated financial statements. Pursuant to the German Facility Agreement, FSM GmbH was required to maintain a euro-denominated debt service reserve account in the amount of €16.6 million ($21.6 million at the balance sheet close rate on December 31, 2011 of $1.30/€1.00) pledged in favor of the lenders. The account was available solely to pay any outstanding interest and principal payments owed under the German Facility Agreement and was a component of our “restricted cash” balance at December 31, 2011. In April 2012, we repaid the entire balance outstanding under the German Facility Agreement and the restriction on the cash related to such debt service reserve account was removed. The restricted cash attributable to such debt service reserve account was reclassified to cash and cash equivalents. See Note 14. “Debt,” for further information.

At June 30, 2012 and December 31, 2011, our restricted investments consisted of long-term marketable securities that we hold through a custodial account to fund future costs of our solar module collection and recycling program. We have classified our restricted investments as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as a part of accumulated other comprehensive income. We report realized gains and losses on the maturity or sale of our restricted investments in earnings, computed using the specific identification method.

We annually fund the estimated collection and recycling cost for the prior year’s module sales within approximately 90 days from the end of each calendar year, assuming for this purpose a minimum service life of 25 years for our solar modules. To ensure that our collection and recycling program is available at all times and the pre-funded amounts are accessible regardless of our financial status in the future (even in the case of our own insolvency), we have established a trust structure under which funds are put into custodial accounts with a large bank as the investment advisor in the name of a trust, for which First Solar, Inc. (“FSI”), First Solar Malaysia Sdn. Bhd. (“FS Malaysia”), and FSM GmbH are grantors. Only the trustee can distribute funds from the

15



custodial accounts and these funds cannot be accessed for any purpose other than for administering our solar module collection and recycling program, such future collection and recycling activities will be performed either by us or a third party. To provide further assurance that sufficient funds will be available, our module collection and recycling program, including the financing arrangement, is reviewed periodically by an independent third party auditor. Cash invested in this custodial account must be invested in highly rated securities, such as highly rated government or agency bonds. We closely monitor our exposure to European markets and maintain holdings of German and French sovereign debt securities which are not currently at risk of default.

The following table summarizes unrealized gains and losses related to our restricted investments by major security type as of June 30, 2012 and December 31, 2011 (in thousands):
 
 
As of June 30, 2012
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
176,335

 
$
24,990

 
$
31

 
$
201,294

U.S. government obligations
 
52,181

 
13,764

 

  
65,945

Total
 
$
228,516

  
$
38,754

  
$
31

 
$
267,239


 
 
As of December 31, 2011
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
132,734

 
$
23,102

 
$

 
$
155,836

U.S. government obligations
 
15,825

 
7,154

 

 
22,979

Total
 
$
148,559

 
$
30,256

 
$

 
$
178,815


Gross unrealized losses as of June 30, 2012 were primarily the result of changes in interest rates. We evaluated these losses and determined these unrealized losses to be temporary because we do not intend to sell the securities, and it is not more-likely-than-not that we will be required to sell these securities before recovery of their amortized cost basis. As of June 30, 2012, the contractual maturities of these restricted investments were between 16 years and 25 years. As of December 31, 2011, the contractual maturities of these restricted investments were between 16 years and 24 years.

Note 9. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade, net consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):

 
 
June 30,
2012
 
December 31,
2011
Accounts receivable trade, gross
 
$
155,670

 
$
320,600

Allowance for doubtful accounts
 
(12,000
)
 
(10,032
)
Accounts receivable trade, net
 
$
143,670

 
$
310,568


At June 30, 2012, we had an immaterial amount of rebate claims accrued, which is included in other current liabilities as the customer did not have an accounts receivable balance to apply the rebate against. At December 31, 2011, we had €1.1 million ($1.4 million at the balance sheet close rate on June 30, 2012 of $1.27/€1.00) of rebate claims accrued, which reduced our accounts receivable accordingly. In addition, at December 31, 2011 we had €10.9 million ($13.8 million at the balance sheet close rate on June 30, 2012 of $1.27/€1.00) of rebate claims accrued, which were included in other current liabilities as customers did not have an accounts receivable balance to apply the rebates against.

Our rebate program ended as of September 30, 2011 and subsequent sales of solar modules are based upon a sales price without any rebates.

Accounts receivable, unbilled
 
Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer. This is common

16



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

Accounts receivable, unbilled were $436.2 million (including $3.5 million of retainage) and $533.4 million (including $35.4 million of retainage) at June 30, 2012 and December 31, 2011, respectively.

Inventories

Inventories consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Raw materials
 
$
181,453

 
$
230,675

Work in process
 
16,205

 
28,817

Finished goods
 
521,018

 
277,126

Inventories
 
$
718,676

 
$
536,618

Inventories — current
 
$
580,737

 
$
475,867

Inventories — noncurrent (1)
 
$
137,939

 
$
60,751


(1) We purchase a critical raw material that is used in our core production process in quantities that exceed anticipated consumption within our operating cycle (which is 12 months). We classify the raw materials that we do not expect to be consumed within our operating cycle as noncurrent. The increase in our noncurrent inventories was primarily the result of a decrease in the amount of such critical raw material we anticipate consuming in our next operating cycle. Such decrease resulted from a combination of the planned reduction in our manufacturing capacity and the amount of critical raw material for our next operating cycle that is required to be sourced through vendor supply agreements.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Prepaid expenses
 
$
43,121

 
$
151,630

Derivative instruments 
 
8,301

 
63,673

Other assets — current
 
85,446

 
113,729

Prepaid expenses and other current assets
 
$
136,868

 
$
329,032


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):

17



 
 
June 30,
2012
 
December 31,
2011
Buildings and improvements
 
$
439,520

 
$
393,676

Machinery and equipment
 
1,332,310

 
1,453,293

Office equipment and furniture
 
119,494

 
110,936

Leasehold improvements
 
54,265

 
48,374

Depreciable property, plant and equipment, gross
 
1,945,589

 
2,006,279

Accumulated depreciation
 
(722,422
)
 
(617,787
)
Depreciable property, plant and equipment, net
 
1,223,167

 
1,388,492

Land
 
22,178

 
8,065

Construction in progress (1)
 
322,022

 
419,401

Property, plant and equipment, net
 
$
1,567,367

 
$
1,815,958


(1)
Included within construction in progress as of June 30, 2012 is $226.0 million of machinery and equipment (“stored assets”) that was originally purchased for installation in our previously planned manufacturing capacity expansions. We intend to install and place the stored assets into service in yet to be determined locations once market demand supports such additional manufacturing capacity. As the stored assets are neither in the condition or location to produce modules as intended we will not begin depreciation until the assets are placed into service. The stored assets are evaluated for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of our long-lived assets may not be recoverable.

See Note 12. “Economic Development Funding,” to our condensed consolidated financial statements for further information about grants recorded as a reduction to the carrying value of the property, plant and equipment related to the expansion of our manufacturing plant in Frankfurt (Oder), Germany.

Depreciation of property, plant and equipment was $64.0 million and $54.4 million for the three months ended June 30, 2012 and June 30, 2011, respectively, and was $136.6 million and $101.5 million for the six months ended June 30, 2012 and June 30, 2011, respectively.

In December 2011, February 2012, and April 2012, we announced a series of restructuring initiatives. As part of those initiatives, certain property, plant and equipment were determined to be impaired and impairment charges were recorded. See Note 4. “Restructuring,” for more information on the long-lived asset impairments related to these restructuring initiatives.

Capitalized interest

We capitalized interest costs incurred into property, plant and equipment or project assets as follows during the three and six months ended June 30, 2012 and June 30, 2011 (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Interest cost incurred
 
$
(9,318
)
 
$
(1,954
)
 
$
(16,050
)
 
$
(3,791
)
Interest cost capitalized —– property, plant and equipment
 
769

 
1,352

 
2,822

 
3,111

Interest cost capitalized —– project assets
 
1,177

 
602

 
4,936

 
680

Interest expense, net
 
$
(7,372
)
 
$

 
$
(8,292
)
 
$


Project assets 

Project assets consist primarily of costs relating to solar power projects in various stages of development that we capitalize prior to entering into a definitive sales agreement for the solar power project. These costs include costs for land and costs for developing and constructing a PV solar power plant. Development costs can include legal, consulting, permitting, interconnect, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred project costs on our condensed consolidated balance sheet until the sale is completed and we have met all of the criteria to recognize the sale as revenue. We expense project assets to cost of sales after each respective project asset is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). We classify project assets

18



generally as noncurrent due to the time required to complete all activities to sell a specific project, which is typically longer than 12 months.
 
Project assets consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Project assets — land
 
$
8,533

 
$
13,704

Project assets — development costs
 
138,990

 
136,251

Project assets — construction costs
 
12,716

 
224,926

Project assets 
 
$
160,239

 
$
374,881


We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project will be recoverable, the most notable of which is whether there are any changes in environmental, ecological, permitting, market pricing or regulatory conditions that impact the project. Such changes could cause the cost of the project to increase or the selling price of the project to decrease. If a project is not considered commercially viable or recoverable, we impair the respective project assets and adjust the carrying value to the estimated recoverable amount, with the resulting impairment recorded within operations.

Deferred project costs

Deferred project costs represent (i) costs that we capitalize as project assets for arrangements that we account for as real estate transactions after we have entered into a definitive sales arrangement, but before the sale is completed and we have met all criteria to recognize the sale as revenue, (ii) recoverable pre-contract costs that we capitalize for arrangements accounted for as long-term construction contracts prior to entering into a definitive sales agreement, or (iii) costs that we capitalize for arrangements accounted for as long-term construction contracts after we have signed a definitive sales agreement, but before all revenue recognition criteria have been met. As of June 30, 2012, deferred project costs were $449.7 million, of which, $189.7 million was classified as current and $260.0 million was classified as noncurrent. As of December 31, 2011, our deferred project costs were $320.4 million, of which $197.7 million was classified as current and $122.7 million was classified as noncurrent. We classify deferred project costs as current if completion of the sale and the meeting of all revenue recognition criteria is expected within the next 12 months.

Note Receivable

On April 8, 2009, we entered into a credit facility agreement with a solar project entity of one of our customers for an available amount of €17.5 million ($22.2 million at the balance sheet close rate on June 30, 2012 of $1.27/€1.00) to provide financing for a PV power generation facility. The credit facility replaced a bridge loan that we had made to this entity. The credit facility bears interest at 8% per annum and is due on December 31, 2026. As of June 30, 2012 and December 31, 2011, the balance on this credit facility was €7.0 million ($8.9 million at the balance sheet close rate on June 30, 2012 of $1.27/€1.00). The outstanding amount of this credit facility is included within “Other assets” on our condensed consolidated balance sheets.

Other Assets
 
Other assets  consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):

 
 
June 30, 2012

 
December 31, 2011
Retainage (1)
 
$
146,168

 
$

Other assets - noncurrent
 
55,961

 
67,615

Other assets 
 
$
202,129

 
$
67,615


(1)
Certain of the engineering, procurement, and construction (“EPC”) contracts for solar power plants we build contain retainage provisions. Retainage refers to the portion of the EPC contract price earned by us for work performed, but held for payment by our customer as a form of security until we reach certain construction milestones. We consider whether collectability of such retainage is reasonably assured in connection with our overall assessment of the

19



collectability of amounts due or that will become due under our EPC contracts. Retainage expected to be collected within 12 months is classified within Accounts receivable, unbilled on the condensed consolidated balance sheet. After we have met the EPC contract requirements to bill for retainage, we will reclassify such amounts to Accounts receivable trade, net. Amounts are expected to be collected in 2013 through 2015, after certain construction milestones have been met.

Accrued expenses

Accrued expenses consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Accrued compensation and benefits
 
$
70,792

 
$
57,480

Accrued property, plant and equipment
 
31,675

 
41,015

Accrued inventory
 
48,848

 
46,028

Product warranty liability (Note 15)
 
97,779

 
78,637

Accrued expenses in excess of normal product warranty liability and related expenses (1)
 
112,801

 
89,893

Other accrued expenses
 
114,922

 
93,606

Accrued expenses
 
$
476,817

 
$
406,659


(1) $112.8 million of accrued expenses in excess of normal product warranty liability and related expenses as of June 30, 2012 consisted primarily of commitments to certain customers, each related to the manufacturing excursion occurring during the period between June 2008 to June 2009 (“2008-2009 manufacturing excursion”), whereby certain modules manufactured during that time period may experience premature power loss once installed in the field. The accrued expense as of June 30, 2012 included the following commitments to certain customers, each related to the 2008-2009 manufacturing excursion and our related remediation program: (i) $53.4 million in estimated expenses for remediation efforts related to module removal, replacement and logistical services committed to by us beyond the normal product warranty; and (ii) $49.6 million in estimated compensation payments to customers, under certain circumstances, for power lost prior to remediation of the customer’s system under our remediation program.

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

Deferred Revenue

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

Other current liabilities

Other current liabilities consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Derivative instruments 
 
$
13,078

 
$
37,342

Deferred tax liabilities
 
3,621

 
6,612

Payments and billings for deferred project costs (1)
 

 
192,440

Other liabilities — current
 
21,834

 
58,252

Other current liabilities
 
$
38,533

 
$
294,646


(1)
Payments and billings for deferred project costs represent customer payments received or customer billings made under the terms of certain solar power project sales contracts for which all revenue recognition criteria for real estate transactions under ASC 360 have not yet been met and are not yet certain of being met in the future. Such solar power project costs

20



are included as a component of current deferred project costs.

Other liabilities

Other liabilities consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Product warranty liability
 
$
84,110

 
$
79,105

Other taxes payable
 
78,103

 
73,054

Payments and billings for deferred project costs (1)
 
282,442

 
167,374

Other liabilities — noncurrent
 
62,568

 
53,973

Other liabilities
 
$
507,223

 
$
373,506


(1)
Payments and billings for deferred project costs represent customer payments received or customer billings made under the terms of certain solar power project sales contracts for which all revenue recognition criteria for real estate transactions under ASC 360 have not yet been met and are not yet certain of being met in the future. Such solar power project costs are included as a component of noncurrent deferred project costs.

Note 10. Derivative Financial Instruments

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

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. As required by ASC 815, Derivatives and Hedging, we report all of our derivative instruments that are within the scope of that accounting standard at fair value. We account for changes in the fair value of derivative instruments within accumulated other comprehensive income (loss) if the derivative instruments qualify for hedge accounting under ASC 815. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. These accounting approaches, the various risks that we are exposed to in our business, and our use of derivative instruments to manage these risks are described below. See Note 11. “Fair Value Measurements,” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair value of derivative instruments included in our condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011 (in thousands):
 
 
June 30, 2012
 
 
Prepaid Expenses and Other Current Assets
 
Other Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
115

 
$

 
$
1,487

 
$

Cross-currency swap contracts
 

 

 
532

 
5,850

Interest rate swap contracts
 

 

 
414

 
1,077

Total derivatives designated as hedging instruments
 
$
115

 
$

 
$
2,433

 
$
6,927

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815:
 
 

 
 

 
 

Foreign exchange forward contracts
 
$
8,186

 
$

 
$
10,645

 
$

Total derivatives not designated as hedging instruments
 
$
8,186

 
$

 
$
10,645

 
$

Total derivative instruments
 
$
8,301

 
$

 
$
13,078

 
$
6,927



21



 
 
December 31, 2011
 
 
Prepaid Expenses and Other Current Assets
 
Other Assets
 
Other Current Liabilities
 
Other Liabilities
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
28,415

 
$

 
$

 
$

Cross-currency swap contracts
 

 

 

 
4,943

Interest rate swap contracts
 

 

 
444

 
2,127

Total derivatives designated as hedging instruments
 
$
28,415

 
$

 
$
444

 
$
7,070

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815:
 
 

 
 

 
 

Foreign exchange forward contracts
 
$
35,258

 
$

 
$
36,898

 
$

Total derivatives not designated as hedging instruments
 
$
35,258

 
$

 
$
36,898

 
$

Total derivative instruments
 
$
63,673

 
$

 
$
37,342

 
$
7,070


The following tables present the amounts related to derivative instruments designated as cash flow hedges under ASC 815 affecting accumulated other comprehensive income (loss) and our condensed consolidated statements of operations for the three and six months ended June 30, 2012 and June 30, 2011 (in thousands):
 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contracts
 
Cross Currency Swap Contract
 
Total
Balance in other comprehensive income (loss) at December 31, 2011
 
$
33,751

 
$
(2,571
)
 
$
(5,899
)
 
$
25,281

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

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

 

 
(6,710
)
Foreign currency gain
 

 

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

 
244

 
71

 
315

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

 
$
(3,241
)
 
$
(6,484
)
 
$
5,975

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

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

 

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

 

 
5,382

 
5,382

Interest expense
 

 
2,084

 
131

 
2,215

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

 
$
(1,491
)
 
$
(6,960
)
 
$
9,689



22



 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contracts
 
Cross Currency Swap Contract
 
Total
Balance in other comprehensive (loss) income at December 31, 2010
 
$
(1,448
)
 
$
(1,219
)
 
$

 
$
(2,667
)
Amounts recognized in other comprehensive (loss) income
 
(53,752
)
 
717

 

 
(53,035
)
Amounts reclassified to earnings impacting:
 
 
 
 
 
 
 
 
Net sales
 
12,380

 

 

 
12,380

Interest expense
 

 
205

 

 
205

Balance in other comprehensive (loss) income at March 31, 2011
 
$
(42,820
)
 
$
(297
)
 
$

 
$
(43,117
)
Amounts recognized in other comprehensive (loss) income
 
(14,393
)
 
(533
)
 

 
(14,926
)
Amounts reclassified to earnings impacting: