XBUE:FSLR First Solar Inc GDR Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 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 April 27, 2012, 86,770,334 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 MARCH 31, 2012

TABLE OF CONTENTS
 
 
Page
Part I.
Financial Information (Unaudited)
 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and March 31, 2011
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2012 and March 31, 2011
 
Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 31, 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
 
 
 
March 31,
2012
 
March 31,
2011
Net sales
 
$
497,055

 
$
567,293

Cost of sales
 
420,310

 
307,628

Gross profit
 
76,745

 
259,665

Operating expenses:
 
 
 
 
Research and development
 
36,084

 
31,351

Selling, general and administrative
 
91,820

 
87,000

Production start-up
 
4,058

 
11,931

Restructuring
 
401,065

 

Total operating expenses
 
533,027

 
130,282

Operating (loss) income
 
(456,282
)
 
129,383

Foreign currency (loss) gain
 
(984
)
 
950

Interest income
 
2,911

 
3,023

Interest expense, net
 
(920
)
 

Other income (expense), net
 
(1,211
)
 
(349
)
(Loss) income before income taxes
 
(456,486
)
 
133,007

Income tax (benefit) expense
 
(7,070
)
 
17,039

Net (loss) income
 
$
(449,416
)
 
$
115,968

Net (loss) income per share:
 
 
 
 
Basic
 
$
(5.20
)
 
$
1.36

Diluted
 
$
(5.20
)
 
$
1.33

Weighted-average number of shares used in per share calculations:
 
 
 
 
Basic
 
86,507

 
85,324

Diluted
 
86,507

 
87,053


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
 
 
 
March 31,
2012
 
March 31,
2011
Net (loss) income
 
$
(449,416
)
 
$
115,968

Other comprehensive (loss) income, net of tax:
 
 
 
 
Foreign currency translation adjustments
 
13,509

 
23,795

Unrealized loss on marketable securities
 
(4,064
)
 
(7,503
)
Unrealized loss on derivative instruments
 
(15,300
)
 
(40,450
)
Other comprehensive loss, net of tax
 
(5,855
)
 
(24,158
)
Comprehensive (loss) income
 
$
(455,271
)
 
$
91,810


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)
 
 
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
610,480

 
$
605,619

Marketable securities
 
53,107

 
66,146

Accounts receivable trade, net
 
315,915

 
310,568

Accounts receivable, unbilled
 
551,610

 
533,399

Inventories
 
582,607

 
475,867

Balance of systems parts
 
122,959

 
53,784

Deferred project costs
 
395,069

 
197,702

Deferred tax assets, net 
 
32,824

 
41,144

Assets held for sale
 
46,232

 

Prepaid expenses and other current assets
 
189,600

 
329,032

Total current assets
 
2,900,403

 
2,613,261

Property, plant and equipment, net
 
1,540,953

 
1,815,958

Project assets 
 
133,764

 
374,881

Deferred project costs
 
207,361

 
122,688

Note receivable, affiliate
 
21,350

 

Deferred tax assets, net 
 
343,174

 
340,274

Marketable securities 
 
86,131

 
116,192

Restricted cash and investments 
 
282,526

 
200,550

Goodwill
 
65,444

 
65,444

Inventories 
 
139,381

 
60,751

Other assets 
 
53,025

 
67,615

Total assets
 
$
5,773,512

 
$
5,777,614

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 

 
 

Accounts payable
 
$
218,216

 
$
176,448

Income taxes payable
 
15,979

 
9,541

Accrued expenses
 
434,333

 
406,659

Current portion of long-term debt
 
58,238

 
44,505

Deferred revenue
 
177,583

 
41,925

Other current liabilities
 
266,684

 
294,646

Total current liabilities
 
1,171,033

 
973,724

Accrued solar module collection and recycling liability
 
177,439

 
167,378

Long-term debt
 
806,070

 
619,143

Other liabilities
 
409,974

 
373,506

Total liabilities
 
2,564,516

 
2,133,751

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 86,714,539 and 86,467,873 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
 
87

 
86

Additional paid-in capital
 
2,043,146

 
2,022,743

Accumulated earnings
 
1,176,655

 
1,626,071

Accumulated other comprehensive loss
 
(10,892
)
 
(5,037
)
Total stockholders’ equity
 
3,208,996

 
3,643,863

Total liabilities and stockholders’ equity
 
$
5,773,512

 
$
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)

 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
Cash flows from operating activities:
 
 
 
 
Cash received from customers
 
$
648,954

 
$
471,600

Cash paid to suppliers and associates
 
(646,949
)
 
(495,427
)
Interest received
 
1,222

 
1,984

Interest paid
 
(6,767
)
 
(3,034
)
Income taxes paid, net of refunds
 
(2,537
)
 
(18,535
)
Excess tax benefit from share-based compensation arrangements
 
(9,489
)
 

Other operating activities
 
(570
)
 
(401
)
Net cash used in operating activities
 
(16,136
)
 
(43,813
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(124,490
)
 
(168,990
)
Purchases of marketable securities and investments
 
(14,446
)
 
(157,151
)
Proceeds from maturities of marketable securities and investments
 
14,800

 
67,448

Proceeds from sales of marketable securities and investments
 
43,067

 
79,114

Investment in note receivable, affiliate
 
(20,278
)
 

Purchase of restricted investments
 
(80,668
)
 
(62,748
)
Acquisitions, net of cash acquired
 
(2,437
)
 
(21,105
)
Other investing activities
 
2,132

 
16

Net cash used in investing activities
 
(182,320
)
 
(263,416
)
Cash flows from financing activities:
 
 
 
 
Proceeds from stock option exercises
 
70

 
2,741

Repayments of borrowings under revolving credit facility
 

 
(100,000
)
Proceeds from borrowings under revolving credit facility
 
200,000

 

Repayments of long-term debt
 
(13,148
)
 
(13,900
)
Excess tax benefit from share-based compensation arrangements
 
9,489

 

Other financing activities
 
(633
)
 
(114
)
Net cash provided by (used in) financing activities
 
195,778

 
(111,273
)
Effect of exchange rate changes on cash and cash equivalents
 
7,539

 
8,538

Net increase (decrease) in cash and cash equivalents
 
4,861

 
(409,964
)
Cash and cash equivalents, beginning of the period
 
605,619

 
765,689

Cash and cash equivalents, end of the period
 
$
610,480

 
$
355,725

Supplemental disclosure of noncash investing and financing activities:
 
 

 
 

Property, plant and equipment acquisitions funded by liabilities
 
$
118,414

 
$
91,186


 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 (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 months ended March 31, 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 fiscal 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, or net income.

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 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, accrued warranty and related expense, accrued collection and recycling expense, share-based compensation costs, 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 against defects in workmanship, engineering design, and installation services under normal use and service conditions for a period of one to two years following the energizing of a section of a solar power plant or upon substantial completion of the entire solar power plant. In resolving claims under the workmanship, engineering design and installation warranties, we have the option of either remedying the defect to the warranted level 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 this estimate 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 in-house testing of and the expected future performance of our solar modules and 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, costs for 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 costs and costs for solar modules 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.

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:

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. Depending on the value of the initial payments and continuing payments commitment by the buyer, we may align our revenue recognition and release of project assets to cost of sales with the receipt of payment from the buyer for sales arrangements accounted for under ASC 360.

We record revenue for certain arrangements covered under ASC 360 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 fixed and variable indirect manufacturing costs, including depreciation and amortization. Our capitalization of costs into inventory is based on normal utilization of our facilities. If production capacity is abnormally utilized, the portion of our indirect manufacturing costs related to the abnormal utilization 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, 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 useful life of the asset.
 
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 fiscal year ended December 31, 2011 for a complete discussion of our significant accounting policies.

Note 3. Recent Accounting Pronouncements

8




In April 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU amends current fair value measurement and disclosure guidance to include increased transparency around valuation input and investment categorization. ASU 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption not permitted. The adoption of ASU 2011-04 in the first quarter of 2012 did not have an impact on our financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 deferred the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011 and must be applied retrospectively. The adoption of ASU 2011-05 in the first quarter of 2012 did not have an impact on our financial position, results of operations, or cash flows.

In December 2011, the 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 $1.2 million in the first quarter of 2012. These charges consisted primarily of (i) $53.6 million of asset impairment and related charges due to a significant reduction in certain research and development activities that had been focused on an alternative PV product, and (ii) $8.0 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 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 an estimated salvage value as of December 31, 2011.

The following table summarizes the balance at December 31, 2011, the activity during the three months ended March 31, 2012, and the balance at March 31, 2012 (in thousands):
December 2011 Restructuring
 
Ending Balance at December 31, 2011
 
Charges to Income
 
Changes in Estimates
 
Cash Payments
 
Non-cash Amounts
 
Ending Balance at March 31, 2012
Asset impairments
 
$

 
$

 
$

 
$

 
$

 
$

Severance and termination related costs
 
6,807

 
1,216

 

 
(3,905
)
 
(166
)
 
3,952

Asset impairment related costs
 
2,346

 

 

 
(158
)
 

 
2,188

Total
 
$
9,153

 
$
1,216

 
$

 
$
(4,063
)
 
$
(166
)
 
$
6,140


Expenses recognized for the above restructuring activities are presented in “Restructuring” on the condensed consolidated

9



statements of operations. Substantially all expenses related to the December 2011 restructuring were related to our components segment. We expect to incur an additional $0.4 million during the remainder of 2012 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 $129.5 million during the three months ended March 31, 2012. These charges consist primarily of (i) $97.2 million of asset impairment and related charges due to our decision in February 2012 not to proceed with our 4-line manufacturing plant under construction in Vietnam, (ii) $25.3 million of asset impairment and related charges due to our decision in February 2012 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 related charges primarily due to our decision in February 2012 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 an impairment charge of $92.2 million was recorded. The carrying amount of the Vietnam plant as of March 31, 2012 was $46.2 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 asset group's 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 three months ended March 31, 2012 of $29.0 million. The aggregate carrying amount for such abandoned long-lived assets was $1.2 million and represents the salvage value of such assets.

The following table summarizes the February 2012 manufacturing restructuring amounts recorded during the three months ended March 31, 2012 and the balance at March 31, 2012 (in thousands):
February 2012 Manufacturing Restructuring
 
Charges to Income
 
Changes in Estimates
 
Cash Payments
 
Non-cash Amounts
 
Ending Balance at March 31, 2012
Asset impairments
 
$
121,190

 
$

 
$

 
$
(121,190
)
 
$

Asset impairment related costs
 
8,265

 

 

 
(2,877
)
 
5,388

Total
 
$
129,455

 
$

 
$

 
$
(124,067
)
 
$
5,388


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.

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 the fourth quarter 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 will also be idling indefinitely the capacity of four production lines at our manufacturing center in Kulim, Malaysia beginning 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

10



2,000 associates.

The restructuring and related initiatives resulted in total charges of $270.4 million in the three months ended March 31, 2012, including: (i) $230.1 million in asset impairments and related charges, primarily related to the Frankfurt (Oder) plants; (ii) $10.5 million in severance and termination related costs; and (iii) $29.8 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. As of March 31, 2012, we concluded that an impairment indicator existed 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 $224.2 million primarily related to the long-lived assets at our Frankfurt (Oder) plant and the remaining carrying value for such impaired long-lived assets is $40.2 million.

The following table summarizes the April 2012 European restructuring amounts recorded during the three months ended March 31, 2012 and the balance at March 31, 2012 (in thousands):
April 2012 European Restructuring
 
Charges to Income
 
Changes in Estimates
 
Cash Payments
 
Non-cash Amounts
 
Ending Balance at March 31, 2012
Asset impairments
 
$
224,226

 
$

 
$

 
$
(224,226
)
 
$

Asset impairment related costs
 
5,844

 

 

 

 
5,844

Severance and termination related costs
 
10,502

 

 

 

 
10,502

Grant repayments
 
29,822

 

 

 
(14,693
)
 
15,129

Total
 
$
270,394

 
$

 
$

 
$
(238,919
)
 
$
31,475


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 $80 million in additional restructuring expense during the remainder of 2012 primarily related to the severance and termination related costs associated with such restructuring initiatives.

Note 5. Acquisitions

2011 Acquisition

Ray Tracker

On January 4, 2011, we acquired 100% of the ownership interest of Ray Tracker, Inc., a tracking technology and photovoltaic (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. During the three months ended March 31, 2011, Ray Tracker did not contribute a material amount to our net sales and net income.

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 three months ended March 31, 2012 were as follows (in thousands):

11



 
 
Components
 
Systems
 
Consolidated
Ending balance, December 31, 2011
 
$

 
$
65,444

 
$
65,444

Ending balance, March 31, 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. The qualitative impairment test includes considering various factors including macroeconomic conditions, industry and market conditions, cost factors, a sustained share price or market capitalization decrease, and any reporting unit specific events. 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 March 31, 2012, our gross goodwill and accumulated goodwill impairment losses were $393.4 million for our components reporting unit.

We have concluded that there have been no changes in facts and circumstances since the date of our last annual goodwill impairment test that would require an interim goodwill impairment test for our systems reporting unit as of March 31, 2012.

Note 7. Cash, Cash Equivalents, and Marketable Securities

Cash, cash equivalents, and marketable securities consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):

12



 
 
 
March 31,
2012
 
December 31,
2011
Cash and cash equivalents:
 
 
 
 
Cash
 
$
603,955

 
$
579,241

Cash equivalents:
 
 
 
 
Commercial paper
 
1,000

 

Money market mutual funds
 
5,525

 
26,378

Total cash and cash equivalents
 
610,480

 
605,619

Marketable securities:
 
  
 
 
Commercial paper
 
5,994

 
9,193

Corporate debt securities
 
44,129

 
55,011

Federal agency debt
 
39,651

 
50,081

Foreign agency debt
 
5,792

 
10,928

Foreign government obligations
 
5,234

 
9,120

Supranational debt
 
36,427

 
45,991

U.S. government obligations
 
2,011

 
2,014

Total marketable securities
 
139,238

 
182,338

Total cash, cash equivalents, and marketable securities
 
$
749,718

 
$
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. During the three months ended March 31, 2012, we realized an immaterial amount in gains and an immaterial amount in losses on our marketable securities. During the three months ended March 31, 2011, we realized $0.1 million in gains and an immaterial amount in 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 carrying 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 March 31, 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 March 31, 2012 and December 31, 2011 (in thousands):
 
 
As of March 31, 2012
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper
 
$
5,994

 
$

 
$

  
$
5,994

Corporate debt securities
 
44,118

 
32

 
21

  
44,129

Federal agency debt
 
39,601

 
52

 
2

  
39,651

Foreign agency debt
 
6,011

 

 
219

  
5,792

Foreign government obligations
 
5,228

 
6

 

  
5,234

Supranational debt
 
36,467

 
18

 
58

  
36,427

U.S. government obligations
 
1,999

 
12

 

 
2,011

Total
 
$
139,418

  
$
120

  
$
300

  
$
139,238



13



 
 
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 March 31, 2012 and December 31, 2011 were as follows (in thousands):
 
 
As of March 31, 2012
 
 
Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
One year or less
 
$
53,062

 
$
47

 
$
2

 
$
53,107

One year to two years
 
68,730

 
70

 
298

 
68,502

Two years to three years
 
17,626

 
3

 

 
17,629

Total
 
$
139,418

 
$
120

 
$
300

 
$
139,238


 
 
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 $0.2 million and the net unrealized loss of $1.0 million as of March 31, 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 March 31, 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):
 
 
As of March 31, 2012
 
 
In Loss Position for
Less Than 12 Months
 
In Loss Position for
12 Months or Greater
 
Total
 
 
Security Type
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Corporate debt securities
 
$
33,519

 
$
21

 
$

 
$

 
$
33,519

 
$
21

Federal agency debt
 
1,702

 
2

 

 

 
1,702

 
2

Foreign agency debt
 
5,791

 
219

 

 

 
5,791

 
219

Supranational debt
 
15,183

 
58

 

 

 
15,183

 
58

Total
 
$
56,195

 
$
300

 
$

 
$

 
$
56,195

 
$
300



14



 
 
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 March 31, 2012 and December 31, 2011 (in thousands):
 
 
 
March 31,
2012
 
December 31,
2011
Restricted cash
 
$
22,346

 
$
21,735

Restricted investments
 
260,180

 
178,815

Restricted cash and investments 
 
$
282,526

 
$
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 is required to maintain a euro-denominated debt service reserve account in the amount of €16.6 million ($22.1 million at the balance sheet close rate on March 31, 2012 of $1.33/€1.00) pledged in favor of the lenders. The account is 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 March 31, 2012 and 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 portion of Restricted cash attributable to such debt service reserve account was reclassified to cash and cash equivalents in April 2012. See Note 14. “Debt,” for further information.

At March 31, 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 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 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.

The following table summarizes unrealized gains and losses related to our restricted investments by major security type as of March 31, 2012 and December 31, 2011 (in thousands):

15



 
 
As of March 31, 2012
 
 
Security Type
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Foreign government obligations
 
$
183,547

 
$
20,673

 
$
299

 
$
203,921

U.S. government obligations
 
51,558

 
4,718

 
17

  
56,259

Total
 
$
235,105

  
$
25,391

  
$
316

 
$
260,180


 
 
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 March 31, 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 March 31, 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 March 31, 2012 and December 31, 2011 (in thousands):

 
 
March 31,
2012
 
December 31,
2011
Accounts receivable trade, gross
 
$
326,228

 
$
320,600

Allowance for doubtful accounts
 
(10,313
)
 
(10,032
)
Accounts receivable trade, net
 
$
315,915

 
$
310,568


At March 31, 2012, we had €8.9 million ($11.8 million at the balance sheet close rate on March 31, 2012 of $1.33/€1.00) of rebate claims accrued, which are included in other current liabilities as customers did not have an accounts receivable balance to apply the rebates against. At December 31, 2011, we had €1.1 million ($1.5 million at the balance sheet close rate on March 31, 2012 of $1.33/€1.00) of rebate claims accrued, which reduced our accounts receivable accordingly. In addition, at December 31, 2011 we had €10.9 million ($14.5 million at the balance sheet close rate on March 31, 2012 of $1.33/€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. During the first quarter of 2012, we completed the processing of 2011 rebate claims and all outstanding rebate related amounts must be used against purchases by June 30, 2012, or they will expire.

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

16



trade, net. Billing requirements vary by contract, but are generally structured around completion of certain construction milestones.
 
Accounts receivable, unbilled were $551.6 million and $533.4 million at March 31, 2012 and December 31, 2011, respectively. We expect to bill and collect these amounts within the next 12 months.

Inventories

Inventories consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Raw materials
 
$
192,890

 
$
230,675

Work in process
 
21,208

 
28,817

Finished goods
 
507,890

 
277,126

Inventories
 
$
721,988

 
$
536,618

Inventories — current
 
$
582,607

 
$
475,867

Inventories — noncurrent (1)
 
$
139,381

 
$
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.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Prepaid expenses
 
$
54,533

 
$
151,630

Derivative instruments 
 
12,281

 
63,673

Other assets — current
 
122,786

 
113,729

Prepaid expenses and other current assets
 
$
189,600

 
$
329,032


Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Buildings and improvements
 
$
334,910

 
$
393,676

Machinery and equipment
 
1,279,745

 
1,453,293

Office equipment and furniture
 
114,576

 
110,936

Leasehold improvements
 
53,129

 
48,374

Depreciable property, plant and equipment, gross
 
1,782,360

 
2,006,279

Accumulated depreciation
 
(677,052
)
 
(617,787
)
Depreciable property, plant and equipment, net
 
1,105,308

 
1,388,492

Land
 
10,882

 
8,065

Construction in progress (1)
 
424,763

 
419,401

Property, plant and equipment, net
 
$
1,540,953

 
$
1,815,958


(1)
Included within construction in progress as of March 31, 2012 is $160.7 million in machinery and equipment that was originally purchased for installation in our previously planned manufacturing capacity expansions. We intend to place such machinery and equipment into service in yet to be determined locations once market demand supports such additional manufacturing capacity. Such machinery and equipment is part of larger asset groups and those asset groups are evaluated for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount

17



of our long-lived assets may not be recoverable. Such amounts of "stored" machinery and equipment were considered recoverable as of March 31, 2012.

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 $72.7 million and $47.1 million for the three months ended March 31, 2012 and March 31, 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/deferred project costs as follows during the three months ended March 31, 2012 and March 31, 2011 (in thousands):
 
 
Three Months Ended
 
 
March 31, 2012
 
March 31, 2011
Interest cost incurred
 
$
(6,732
)
 
$
(1,837
)
Interest cost capitalized —– property, plant and equipment
 
2,054

 
1,759

Interest cost capitalized —– project assets and deferred project costs
 
3,758

 
78

Interest expense, net
 
$
(920
)
 
$


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 balance sheet until the sale is completed and we have met all of the criteria to recognize the sale as revenue. We expense these project assets to cost of sales after each respective project asset is sold to a customer and all revenue recognition criteria have been met (matching the expensing of costs to the underlying revenue recognition method). We classify project assets generally as noncurrent due to the 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 March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Project assets — land
 
$
8,538

 
$
13,704

Project assets — development costs
 
121,500

 
136,251

Project assets — construction costs
 
3,726

 
224,926

Project assets 
 
$
133,764

 
$
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 sellable for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable 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, 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 asset and adjust it to the estimated recoverable amount, with the resulting impairment recorded within operations.

Deferred project costs

18




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 March 31, 2012, deferred project costs were $602.4 million, of which, $395.1 million was classified as current and $207.4 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.

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 ($23.3 million at the balance sheet close rate on March 31, 2012 of $1.33/€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 March 31, 2012 and December 31, 2011, the balance on this credit facility was €7.0 million ($9.3 million at the balance sheet close rate on March 31, 2012 of $1.33/€1.00). The outstanding amount of this credit facility is included within “Other assets” on our consolidated balance sheets.

Accrued expenses

Accrued expenses consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Accrued compensation and benefits
 
$
45,045

 
$
57,480

Accrued property, plant and equipment
 
49,833

 
41,015

Accrued inventory
 
40,904

 
46,028

Product warranty liability
 
98,855

 
78,637

Accrued expenses in excess of normal product warranty liability and related expenses (1)
 
106,506

 
89,893

Other accrued expenses
 
93,190

 
93,606

Accrued expenses
 
$
434,333

 
$
406,659


(1) $106.5 million of accrued expenses in excess of normal product warranty liability and related expenses as of March 31, 2012, consisted of the following commitments to certain customers, each related to the 2008-2009 manufacturing excursion and our related remediation program: (i) $54.3 million in estimated expenses for remediation efforts related to module removal, replacement and logistical services committed to and undertaken by us beyond the normal product warranty; and (ii) $52.2 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. The increase in the accrued liability of $16.6 million during the first quarter of 2012 was primarily due to completing the analysis of the open claims outstanding as of December 31, 2011.

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 when all revenue recognition criteria are met. We expect to recognize these amounts as revenue within the next 12 months.

Other current liabilities



19



Other current liabilities consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Derivative instruments 
 
$
12,233

 
$
37,342

Deferred tax liabilities
 
2,509

 
6,612

Payments and billings for deferred project costs (1)
 
191,751

 
192,440

Other liabilities — current
 
60,191

 
58,252

Other current liabilities
 
$
266,684

 
$
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 are included as a component of deferred project costs.

Other liabilities

Other liabilities consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31,
2012
 
December 31,
2011
Product warranty liability
 
$
80,599

 
$
79,105

Other taxes payable
 
75,290

 
73,054

Payments and billings for deferred project costs (1)
 
210,919

 
167,374

Other liabilities — noncurrent
 
43,166

 
53,973

Other liabilities
 
$
409,974

 
$
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 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 derivatives 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 March 31, 2012 and December 31, 2011 (in thousands):

20



 
 
March 31, 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
 
$
100

 
$

 
$
8,735

 
$

Cross-currency swap contracts
 

 

 
44

 
481

Interest rate swap contracts
 

 

 
429

 
1,116

Total derivatives designated as hedging instruments
 
$
100

 
$

 
$
9,208

 
$
1,597

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815:
 
 

 
 

 
 

Foreign exchange forward contracts
 
$
12,181

 
$

 
$
2,912

 
$

Interest rate swap contracts
 

 

 
113

 
1,582

Total derivatives not designated as hedging instruments
 
$
12,181

 
$

 
$
3,025

 
$
1,582

Total derivative instruments
 
$
12,281

 
$

 
$
12,233

 
$
3,179


 
 
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 effective 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 months ended March 31, 2012 and March 31, 2011 (in thousands):
 
 
Foreign Exchange Forward Contracts
 
Interest Rate Swap Contracts
 
Cross Currency Swap Contract
 
Total
Balance at December 31, 2011
 
$
33,751

 
$
(2,571
)
 
$
(5,899
)
 
$
25,281

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

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

 

 
(6,710
)
Foreign currency loss (gain)
 

 

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

 
244

 
71

 
315

Balance at March 31, 2012
 
$
15,700

 
$
(3,241
)
 
$
(6,484
)
 
$
5,975



21



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

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

 

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

 

 

 
12,380

Foreign currency loss (gain)
 

 

 

 

Interest expense (income)
 

 
205

 

 
205

Balance at March 31, 2011
 
$
(42,820
)
 
$
(297
)
 
$

 
$
(43,117
)

We recorded immaterial amounts of unrealized losses related to ineffective portions of our derivative instruments designated as cash flow hedges during the three months ended March 31, 2012 and March 31, 2011 directly to other income (expense). In addition, we recognized unrealized losses of $0.3 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within other income (expense) during the three months ended March 31, 2012.

The following table presents the amounts related to derivative instruments not designated as cash flow hedges under ASC 815 affecting our consolidated statements of operations for the three months ended March 31, 2012 and March 31, 2011 (in thousands):
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
 
 
Three Months Ended
 
Three Months Ended
 
 
Derivatives not designated as hedging instruments under ASC 815:
 
March 31,
2012
 
March 31,
2011
 
Location of Gain (Loss) Recognized in Income on Derivatives
Foreign exchange forward contracts
 
$
7,354

 
$
1,209

 
Foreign currency (loss) gain
Foreign exchange forward contracts
 
$
808

 
$
3,082

 
Cost of sales

Interest Rate Risk

We use cross-currency swap contracts and interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use such swap contracts for speculative or trading purposes.

On November 16, 2011, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our German Facility Agreement, which became effective on November 18, 2011 with an initial notional value of €50.0 million and pursuant to which we are entitled to receive a three-month floating interest rate, the Euro Interbank Offered Rate (EURIBOR), and are required to pay a fixed rate of 1.985%. The notional amount of the interest rate swap contract is scheduled to decline in correspondence with scheduled principal payments on the underlying hedged debt. As of March 31, 2012, the notional value of this interest rate swap contract was €50.0 million. This derivative instrument qualified for accounting as a cash flow hedge in accordance with ASC 815 and we designated it as such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at December 31, 2011. For the three months ended March 31, 2012, there was no ineffectiveness from this cash flow hedge.

As of March 31, 2012, we discontinued hedge accounting for the interest rate swap contract related to our German Facility Agreement as the forecasted interest payments were no longer probable of occurring as originally scheduled. See Note 14. “Debt,” to our condensed consolidated financial statements for further information.

On September 30, 2011, we entered into a cross-currency swap contract to hedge the floating rate foreign currency denominated loan under our Malaysian Ringgit Facility Agreement. This swap has an initial notional value of MYR465.0 million and entitles us to receive a three-month floating Kuala Lumpur Interbank Offered Rate (KLIBOR) interest rate, and requires us to pay a fixed U.S. dollar rate of 3.495%. Additionally, this swap hedges the foreign currency risk of the Malaysian Ringgit denominated principal and interest payments. The notional amount of the swap is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. As of March 31, 2012, the notional value of this cross-currency swap agreement was MYR465.0 million. This swap is a derivative instrument that qualifies for accounting as a cash flow hedge in accordance with ASC 815 and we designated it as such. We determined that this swap was highly effective as a cash flow hedge at March 31, 2012

22



and December 31, 2011. For the three months ended March 31, 2012, there was no ineffectiveness from this cash flow hedge.

On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our Malaysian credit facility, which became effective on September 30, 2009 with an initial notional value of €57.3 million and pursuant to which we are entitled to receive a six-month floating interest rate, the Euro Interbank Offered Rate (EURIBOR), and are required to pay a fixed rate of 2.80%. The notional amount of the interest rate swap contract is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. As of March 31, 2012, the notional value of this interest rate swap contract was €33.8 million. This derivative instrument qualifies for accounting as a cash flow hedge in accordance with ASC 815 and we designated it as such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at March 31, 2012 and December 31, 2011. For the three months ended March 31, 2011 and March 31, 2012, there was no ineffectiveness from this cash flow hedge.

In the following 12 months, we expect to reclassify to earnings $0.6 million of net unrealized losses related to the interest rate swap contracts and cross-currency swap contract that are included in accumulated other comprehensive income (loss) at March 31, 2012 as we realize the earnings effect of the underlying loans. The amount we ultimately record to earnings will depend on the actual interest rate, and foreign exchange rate when we realize the earnings effect of the underlying loans.

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect many of the subsidiaries of our business to have material future cash flows, including revenues and expenses that will be denominated in currencies other than the subsidiaries’ functional currency. Our primary cash flow exposures are revenues and expenses. Changes in the exchange rates between our components' functional currencies and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of March 31, 2012 and December 31, 2011, these foreign exchange contracts hedged our forecasted cash flows for up to 9 months and 12 months, respectively. These foreign exchange contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of the derivative's gain or loss in accumulated other comprehensive income (loss) and subsequently reclassify amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges at March 31, 2012 and December 31, 2011. In addition, during the three months ended March 31, 2012, we did not discontinue any cash flow hedges because a hedging relationship was no longer highly effective.

During the three months ended March 31, 2012, we did not purchase any foreign exchange forward contracts that qualify as cash flow hedges. However, certain foreign exchange forward contracts purchased in previous periods to hedge the exchange risk on forecasted cash flows denominated in Euro, Canadian dollar, and Australian dollar remained outstanding. As of March 31, 2012 and December 31, 2011, the notional values associated with our foreign exchange contracts were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
 
 
 
 
Weighted Average Forward Exchange Rate
 
Balance sheet close rate on
Currency
 
Notional Amount
 
USD Equivalent
 
March 31, 2012
 
March 31, 2012
Canadian dollar
 
CAD 192.0
 
$192.0
 
$0.97/CAD1.00
 
$1.00/CAD1.00
Australian dollar
 
AUD 8.0
 
$8.3
 
$1.03/AUD1.00
 
$1.04/AUD1.00

 
 
 
 
 
 
Weighted Average Forward Exchange Rate
 
Balance sheet close rate on
Currency
 
Notional Amount
 
USD Equivalent
 
December 31, 2011
 
March 31, 2012
Euro
 
€81.0
 
$107.7
 
$1.37/€1.00
 
$1.33/€1.00
Canadian dollar
 
CAD 340.0
 
$340.0
 
$1.05/CAD1.00
 
$1.00/CAD1.00
Australian dollar
 
AUD 8.0
 
$8.3
 
$1.03/AUD1.00
 
$1.04/AUD1.00

As of March 31, 2012, the net unrealized gain on these contracts was $10.4 million. As of December 31, 2011, the unrealized gain on these contracts was $31.2 million.

In the following 12 months, we expect to reclassify to earnings $10.4 million of net unrealized gains related to these forward contracts that are included in accumulated other comprehensive income (loss) at March 31, 2012 as we realize the earnings effect

23



of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rate when we realize the related forecasted transactions.

During 2011 and the three months ended March 31, 2012, we determined that certain forecasted transactions were no longer probable of occurring and we discontinued hedge accounting for those foreign exchange forward contracts in accordance with ASC 815. In the following 12 months we expect to reclassify to earnings $5.3 million of net unrealized gains related to such discontinued foreign exchange forward contracts from accumulated other comprehensive income (loss) at March 31, 2012. Although these contracts are no longer designated as cash flow hedges, the related unrealized gains still receive hedge accounting treatment.

Transaction Exposure and Economic Hedging

Many components of our business have assets and liabilities (primarily receivables, investments, accounts payable, debt, and solar module collection and recycling liabilities) that are denominated in currencies other than the components’ functional currencies. Changes in the exchange rates between our components’ functional currencies and the other currencies in which these assets and liabilities are denominated can create fluctuations in our reported condensed consolidated financial position, results of operations, and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on the foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency assets and liabilities.
 
During the three months ended March 31, 2012, we purchased foreign exchange forward contracts to hedge balance sheet and other exposures related to transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting under ASC 815. We recognize gains or losses from the fluctuation in foreign exchange rates and the fair value of these derivative contracts in “Net sales,” “Cost of sales,” and “Foreign currency gain (loss)” on our condensed consolidated statements of operations, depending on where the gain or loss from the economically hedged item is classified on our condensed consolidated statements of operations. As of March 31, 2012, the total unrealized gain on our foreign exchange forward contracts was $4.0 million. These contracts have maturities of less than nine months.

As of March 31, 2012, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting under ASC 815 were as follows (notional amounts and U.S. dollar equivalents in millions):
 
 
 
 
 
 
 
 
Balance sheet close rate on
Transaction
 
Currency
 
Notional Amount
 
USD Equivalent
 
March 31, 2012
Purchase
 
Euro
 
€324.8
 
$432.0
 
$1.33/€1.00
Sell
 
Euro
 
€217.3
 
$289.0
 
$1.33/€1.00
Sell
 
Australian dollar
 
AUD 15.5
 
$16.1
 
$1.04/AUD1.00
Purchase
 
Malaysian ringgit
 
MYR 157.4
 
$51.9
 
$0.33/MYR1.00
Sell
 
Malaysian ringgit
 
MYR 41.9
 
$13.8
 
$0.33/MYR1.00
Purchase
 
Chinese renminbi
 
CNY 16.7
 
$2.7
 
$0.16/CNY1.00
Purchase
 
Japanese yen
 
JPY 362.1
 
$3.6
 
$0.01/JPY1.00
Sell
 
Japanese yen
 
JPY 164.1
 
$1.6
 
$0.01/JPY1.00
Purchase
 
Canadian dollar
 
CAD 183.8
 
$183.8
 
$1.00/CAD1.00
Sell
 
Canadian dollar
 
CAD 181.0
 
$181.0
 
$1.00/CAD1.00

The table above includes certain foreign exchange forward contracts originally designated as cash flow hedges but that were subsequently dedesignated.

Note 11. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and provides financial statement disclosure requirements for fair value measurements. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:


24



Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

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

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

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

Cash equivalents. At March 31, 2012, our cash equivalents consisted of money market mutual funds and commercial paper. At December 31, 2011, our cash equivalents consisted of money market mutual funds. We value our commercial paper cash equivalents using quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2. We value our money market cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.

Marketable securities and restricted investments. At March 31, 2012, our marketable securities consisted of commercial paper, corporate debt securities, federal and foreign agency debt, foreign government obligations, supranational debt, and U.S. government obligations, and our restricted investments consisted of foreign and U.S. government obligations. At December 31, 2011, our marketable securities consisted of commercial paper, corporate debt securities, federal and foreign agency debt, foreign government obligations, supranational debt, and U.S. government obligations, and our restricted investments consisted of foreign and U.S. government obligations. We value our marketable securities and restricted investments using quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2. We also consider the effect of our counterparties' credit standings in these fair value measurements.

Derivative assets and liabilities. At March 31, 2012 and December 31, 2011, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies and interest rate swap contracts involving benchmark interest rates, and a cross-currency swap including both. Since our derivative assets and liabilities are not traded on an exchange, we value them using industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. These inputs are observable in active markets over the terms of the instruments we hold, and accordingly, we classify these valuation techniques as Level 2. We consider the effect of our own credit standing and that of our counterparties in our valuations of our derivative assets and liabilities.

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

Since there is not an established market for collecting and recycling our solar modules, we value our liability using a valuation model (an income approach). This fair value measurement requires us to use significant unobservable inputs, which are primarily estimates of collection and recycling process costs and estimates of future changes in costs due to

25



inflation and future currency exchange rates. Accordingly, we classify these valuation techniques as Level 3. We estimate collection and recycling process costs based on analyses of the collection and recycling technologies that we are currently developing; we estimate future inflation costs based on analysis of historical trends; and we estimate future currency exchange rates based on current rate information. We consider the effect of our own credit standing in our measurement of the fair value of this liability.

At March 31, 2012 and December 31, 2011, information about inputs into the fair value measurements of our assets and liabilities that we make on a recurring basis was as follows (in thousands):
 
 
As of March 31, 2012
 
 
 
 
Fair Value Measurements at Reporting
Date Using
 
 
 
 
 
 
 
Total Fair
Value and
Carrying
Value on Our
Balance Sheet
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Commercial paper
 
$
1,000

 
$

 
$
1,000

 
$

Money market mutual funds
 
5,525

 
5,525

 

 

Marketable securities:
 
 
 
  

  
  

  
  

Commercial paper