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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 29, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-33156
First Solar, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-4623678
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification
No.)
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4050 East Cotton Center Boulevard,
Building 6, Suite 68,
Phoenix, Arizona 85040
(Address of principal executive
offices, including zip code)
(602) 414-9300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, $0.001 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form
10-K or any
amendment to this
Form 10-K. o
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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common
stock, $0.0001 par value per share, held by non-affiliates
of the registrant on June 30, 2007, the last business day
of the registrants most recently completed second fiscal
quarter, was approximately $2,552,331,256 (based on the closing
sales price of the registrants common stock on that date).
Shares of the registrants common stock held by each
officer and director and each person who owns 5% or more of the
outstanding common stock of the registrant have been excluded in
that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of
February 18, 2008, 78,649,834 shares of the
registrants common stock, $0.0001 par value per
share, were issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report
on Form
10-K, to the
extent not set forth herein, is incorporated by reference from
the registrants definitive proxy statement relating to the
Annual Meeting of Shareholders to be held in 2008, which will be
filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year to which this
Annual Report on
Form 10-K
relates.
FIRST
SOLAR, INC.
Form 10-K
for the Fiscal Year Ended December 29, 2007
Index
Throughout this Annual Report on
Form 10-K,
we refer to First Solar, Inc. and its consolidated subsidiaries
as First Solar, the Company,
we, us, and our. Our fiscal
years end on the last Saturday in December. Our last three
fiscal years ended December 29, 2007, December 30,
2006 and December 31, 2005.
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NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 and the Securities Act of 1933,
which are subject to risks, uncertainties and assumptions that
are difficult to predict. All statements in this Annual Report
on
Form 10-K,
other than statements of historical fact, are forward-looking
statements. These forward-looking statements are made pursuant
to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements include
statements, among other things, concerning our business
strategy, including anticipated trends and developments in and
management plans for, our business and the markets in which we
operate; future financial results, operating results, revenues,
gross margin, operating expenses, products, projected costs and
capital expenditures; research and development programs; sales
and marketing initiatives; and competition. In some cases, you
can identify these statements by forward-looking words, such as
estimate, expect,
anticipate, project, plan,
intend, believe, forecast,
foresee, likely, may,
should, goal, target,
might, will, could,
predict and continue, the negative or
plural of these words and other comparable terminology. The
forward-looking statements are only predictions based on our
current expectations and our projections about future events.
All forward-looking statements included in this Annual Report on
Form 10-K
are based upon information available to us as of the filing date
of this Annual Report on
Form 10-K.
You should not place undue reliance on these forward-looking
statements. We undertake no obligation to update any of these
forward-looking statements for any reason. These forward-looking
statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance, or achievements to differ materially from
those expressed or implied by these statements. These factors
include the matters discussed in the section entitled
Item 1A: Risk Factors and elsewhere in this
Annual Report on
Form 10-K.
You should carefully consider the risks and uncertainties
described under this section.
PART I
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. In 2007, our average manufacturing costs were $1.23
per watt, which we believe is significantly less than those of
traditional crystalline silicon solar module manufacturers. By
continuing to expand production and improve our technology and
manufacturing process, we believe that we can further reduce our
manufacturing costs per watt and improve our cost advantage over
traditional crystalline silicon solar module manufacturers. Our
objective is to become, by 2010, the first solar module
manufacturer to offer a solar electricity solution that can
generate electricity on a non-subsidized basis at a cost equal
to the price of retail electricity in key markets in North
America, Europe and Asia.
We manufacture our solar modules on high-throughput production
lines and perform all manufacturing steps ourselves in an
automated, proprietary, continuous process. Our solar modules
employ a thin layer of cadmium telluride semiconductor material
to convert sunlight into electricity. In less than three hours,
we transform a 2ft × 4ft (60cm × 120cm) sheet of glass
into a complete solar module, using approximately 1% of the
semiconductor material used by other manufacturers to produce
crystalline silicon solar modules. Our manufacturing process
eliminates the multiple supply chain operators and expensive and
time consuming batch processing steps that are used to produce a
crystalline silicon solar module.
We have long-term solar module supply contracts (the Long
Term Supply Contracts) with twelve European project
developers and system integrators that in the aggregate allow
for approximately 4.5 billion ($5.9 billion at
an assumed exchange rate of $1.30/1.00) in sales from 2008
to 2012 for the sale of a total of 3.2GW of solar modules.
Our customers develop, own and operate solar power plants or
sell turnkey solar power plants to end-users that include owners
of land, owners of agricultural buildings, owners of commercial
warehouses, offices and industrial buildings, public agencies,
municipal government authorities, utility companies, and
financial investors that desire to own large scale solar power
plant projects.
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In order to satisfy our contractual requirements and address
additional market demand, we are expanding our manufacturing
capacity with the construction of four plants each
with four production lines at our Malaysian
manufacturing center. In August 2006, we expanded our Ohio plant
from one to three production lines. In April 2007, we started
initial production at a four line manufacturing plant in
Germany, which reached full capacity in the third quarter of
2007. Also in April 2007, we began construction of plant one of
our Malaysian manufacturing center. In the third and fourth
quarters of 2007, we began construction of plants two and three,
respectively; and in the first quarter of 2008, we began
construction of plant four. We expect plant one to reach its
full capacity in the second half of 2008; plant two to reach its
full capacity in the first half of 2009; and plants three and
four to reach full capacity in the second half of 2009. After
plant four of our Malaysian manufacturing center reaches its
full capacity, we will have 23 production lines and an annual
global manufacturing capacity of approximately 1012MW based on
the fourth quarter of 2007 average run rate at our existing
plants.
Acquisition
of Turner Renewable Energy, LLC
On November 30, 2007, we completed the acquisition of
Turner Renewable Energy, LLC, a privately held company which
designed and deployed commercial solar projects for utilities in
the United States. Starting in December 2007, we operate this
wholly owned subsidiary under the name of First Solar Electric,
LLC (First Solar Electric). We believe the
acquisition of Turner Renewable Energy, LLC will enable us to
offer solar electricity solutions to utility companies in the
United States that are seeking cost effective renewable energy
solutions for the purpose of meeting renewable portfolio
standard requirements. The total consideration for the
transaction was $34.3 million (excluding exit and
transaction costs of $0.7 million), consisting of
$28.0 million in common stock and $6.3 million in cash.
Products
Solar
Modules
Each solar module is approximately 2ft × 4ft (60cm ×
120cm) and had an average rated power of approximately 64 watts
for 2006 and approximately 70 watts for 2007. Our solar module
is a single-junction polycrystalline thin film structure that
employs cadmium telluride as the absorption layer and cadmium
sulfide as the window layer. Cadmium telluride has absorption
properties that are highly matched to the solar spectrum and has
the potential to deliver competitive conversion efficiencies
with approximately 1% of the semiconductor material used by
traditional crystalline silicon solar modules. Our thin film
technology also has relatively high energy performance in low
light and high temperature environments compared to traditional
crystalline silicon solar modules.
Certifications
We have participated, or are currently participating, in
laboratory and field tests with the National Renewable Energy
Laboratory, the Arizona State University Photovoltaic Testing
Laboratory, the Fraunhofer Institute for Solar Energy, TÜV
Immissionsschutz und Energiesysteme GmbH, and the Institute
für Solar Energieversorgungstechnik. Currently, we have
approximately 10,000 solar modules installed worldwide at test
sites designed to collect data for field performance validation.
Using data logging equipment, we also monitor approximately
457,000 solar modules, representing approximately 30MW of
installed photovoltaic systems, in use by the end-users that
have purchased systems using our solar modules. The modules in
these monitored systems represent approximately 19% of all solar
modules shipped by us from 2002 through 2007.
We maintain all certifications required to sell solar modules in
the markets we serve or expect to serve, including UL 1703, IEC
61646, Safety Class II and CE.
Solar
Module Warranty
We provide a limited warranty to the owner of our solar modules
for five years following delivery for defects in materials and
workmanship under normal use and service conditions. We also
warrant to the owner 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
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rating during the following 15 years. In resolving claims
under both the defects and power output warranties, we have the
option of either repairing or replacing the covered solar module
or, under the power output warranty, providing additional solar
modules to remedy the power shortfall. Our warranties are
automatically transferred from the original purchaser of our
solar modules to a subsequent purchaser. As of December 29,
2007, our accrued warranty liability was $7.3 million.
Collection
and Recycling Program
End-users can return their solar modules to us at any time for
collection and recycling at no cost. We pre-fund the estimated
collection and recycling cost at the time of sale, assuming for
this purpose a minimum service life of approximately
20 years for our solar modules. In addition to achieving
substantial environmental benefits, our solar module collection
and recycling program may provide us the opportunity to resell
or redistribute working modules or recover certain raw materials
and components for reuse in our manufacturing process. First
Solar has developed a recycling process for manufacturing scrap,
warranty returns and end of life modules that produces glass
suitable for the use in production of new glass products and
extracts metals that will be further processed by a third party
supplier to produce semiconductor materials for reuse in our
solar modules.
Manufacturing
Manufacturing
Process
We have integrated our manufacturing processes into a
continuous, integrated production line with the following three
stages: the deposition stage; the cell
definition stage; and the assembly and test
stage. In the deposition stage, panels of treated glass are
robotically loaded onto the production line where they are
cleaned, heated and coated with a layer of cadmium sulfide
followed by a layer of cadmium telluride using our proprietary
vapor transport deposition technology, after which the
semiconductor-coated plates are cooled rapidly to increase
strength. In our cell definition stage, we use a series of
lasers to transform the large single semiconductor-coated plate
into a series of lasers to transform the large single
semiconductor-coated plate into a series of interconnected cells
that deliver the desired current and voltage output. Our
proprietary laser scribing technology is capable of
accomplishing accurate and complex scribes at high speeds.
Finally, in the assembly and test stage, we apply busbars,
laminate, a rear glass cover sheet and termination wires, seal
the joint box and subject each solar module to a solar simulator
and current leakage test. The final assembly stage is the only
stage in our production line that requires manual processing.
Historically, all of our solar modules were produced at our
Perrysburg, Ohio facility, which has received both an ISO
9001:2000 quality system certification and ISO 14001:2004
environmental system certification. In April 2007, we started
initial production at a manufacturing facility in
Frankfurt/Oder, Germany which has received all applicable
licenses and permits to operate in accordance with German law.
Our German plant has received ISO 9001:2000 quality system
certification and we anticipate the German plant to attain an
ISO 14001:2004 environmental system certification in the third
quarter of 2008.
Manufacturing
Capacity Expansion
We plan to expand our manufacturing capacity to 23 production
lines by the end of 2009. In August 2006, we qualified two
additional production lines at our Ohio plant, increasing our
annual manufacturing capacity then to approximately 75MW based
on the fourth quarter of 2006 run rate. In April 2007, we
started initial production at our four line manufacturing plant
in Germany, which reached full capacity in the third quarter of
2007 bringing our total capacity to 308 MW at the end of
2007 based on the fourth quarter of 2007 run rates at these
plants. In addition, on January 24, 2007 we entered into a
land lease agreement for a manufacturing center site in the
Kulim Hi-Tech Park in the State of Kadah, Malaysia. The Malaysia
site accommodates up to four plants, each with four productions
lines. In April 2007, we began construction of plant one of our
Malaysian manufacturing center. In the third and fourth quarters
of 2007, we began construction of plants two and three
respectively, and in the first quarter of 2008, we began
construction of plant four. We expect plant one to reach its
full capacity in the second half of 2008; plant two to reach its
full capacity in the first half of 2009, and plants three and
four to reach full capacity in the second
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half of 2009. After plant four of our Malaysian manufacturing
center reaches its full capacity, planned for the second half of
2009, we will have 23 production lines and an annual global
manufacturing capacity of 1012MW.
Raw
Materials
Our manufacturing process uses approximately 20 types of raw
materials and components to construct a complete solar module.
Of these raw materials and components, the following nine are
critical to our manufacturing process: TCO coated front glass,
cadmium sulfide, cadmium telluride, photo resist, laminate,
tempered back glass, cord plate/cord plate cap, lead wire (UL
and TÜV) and solar connectors. Before we use these
materials and components in our manufacturing process, a
supplier must undergo a qualification process that can last up
to 12 months, depending on the type of raw material or
component. Although we continually evaluate new suppliers and
currently are qualifying several new suppliers, most of our
critical materials or components are either sole sourced or
supplied by a limited number of suppliers.
One critical raw material in our production process is cadmium
telluride. Presently, we purchase all of our cadmium telluride
in compounded form from a limited number of suppliers. We have a
long term supply contract with one of our cadmium telluride
suppliers, which provides for quarterly price adjustments based
on the cost of tellurium.
Customers
We have Long Term Supply Contracts with twelve principal
customers for the sale of solar modules. These customers include
project developers, system integrators and operators of
renewable energy projects, and are headquartered throughout the
European Union. The Long Term Supply Contracts in the aggregate
allow for approximately 4.5 billion
($5.9 billion at an assumed exchange rate of
$1.30/1.00) in sales from 2008 to 2012 for the sale of a
total of 3.2GW of solar modules.
In 2007, our principal customers were Blitzstrom GmbH, Colexon
Energy AG (previously Reinecke + Pohl), Conergy AG, Gehrlicher
Umweltschonende Energiesysteme GmbH, Juwi Solar GmbH and Phoenix
Solar AG. During 2007, each of these six customers individually
accounted for between 10% and 23% of our net sales. All of our
other customers individually accounted for less than 10% of our
net sales in 2007. The loss of any of our major customers could
have an adverse effect on our business. As we expand our
manufacturing capacity, we anticipate developing additional
customer relationships in other markets and regions; which will
reduce our customer and geographic concentration and dependence.
Sales and
Marketing
We launched the marketing and sale of our solar modules in
Germany in 2003 because Germany has attractive feed-in tariffs,
a high forecasted growth rate for renewable energy and market
segments that we believe are well served by our product. Since
2003, our focus has been on grid-connected ground or large roof
mounted solar power plants in Germany and other European Union
countries with feed-in tariff subsidies that enable solar power
plant owners to earn a reasonable rate of return on their
capital. Several of our principal customers were authorized in
2007 to sell our solar modules in the United States in markets
that have rebates or other forms of subsidies. In November 2007,
we completed the acquisition of Turner Renewable Energy, LLC and
established a wholly owned subsidiary First Solar Electric, for
the purpose of developing solar electricity solutions for
utility companies in the United States that are seeking cost
effective renewable energy solutions for the purpose of meeting
renewable portfolio standard requirements.
Economic
Incentives
Government subsidies, economic incentives and other support for
solar electricity generation generally include feed-in tariffs,
net metering programs, renewable portfolio standards, rebates,
tax incentives and low interest loans.
Under a feed-in tariff subsidy, the government sets prices that
regulated utilities are required to pay for renewable
electricity generated by end-users. The prices are set above
market rates and may differ based on system size or application.
Net metering programs enable end-users to sell excess solar
electricity to their local utility in
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exchange for a credit against their utility bills. The policies
governing net metering vary by state and utility. Some utilities
pay the end-user upfront, while others credit the
end-users bill. Under a renewable portfolio standard, the
government requires regulated utilities to supply a portion of
their total electricity in the form of renewable electricity.
Some programs further specify that a portion of the renewable
energy quota must be from solar electricity, while others
provide no specific technology requirement for renewable
electricity generation.
Tax incentive programs exist in the United States at both the
federal and state level and can take the form of investment tax
credits, accelerated depreciation and property tax exemptions.
At the United States federal level, investment tax credits for
business and residential solar systems have gone through several
cycles of enactment and expiration since the 1980s.
Several state governments also facilitate low interest loans for
photovoltaic systems, either through direct lending, credit
enhancement or other programs.
Regulations and policies relating to electricity pricing and
interconnection also encourage distributive generation with
photovoltaic systems. Photovoltaic systems generate most of
their electricity during the afternoon hours when the demand for
and cost of electricity is highest. As a result, electricity
generated by photovoltaic systems mainly competes with expensive
peak hour electricity, rather than the less expensive average
price of electricity. Modifications to the peak hour pricing
policies of utilities, such as to a flat rate, would require
photovoltaic systems to achieve lower prices in order to compete
with the price of electricity. In addition, interconnection
policies often enable the owner of a photovoltaic system to feed
solar electricity into the power grid without interconnection
costs or standby fees.
Research,
Development and Engineering
We continue to devote a substantial amount of resources to
research and development with the objective of lowering the per
watt price of solar electricity generated by photovoltaic
systems using our solar modules to a level that competes on a
non-subsidized basis with the price of retail electricity in key
markets in North America, Europe and Asia by 2010. To reduce the
per watt manufacturing cost of electricity generated by
photovoltaic systems using our solar modules, we focus our
research and development on the following areas:
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Increase the conversion efficiency of our solar
modules. We believe the most promising ways of
increasing the conversion efficiency of our solar modules are
maximizing the number of photons that reach the absorption layer
of the semiconductor material so that they can be converted into
electrons, maximizing the number of electrons that reach the
surface of the cadmium telluride and minimizing the electrical
losses between the semiconductor layer and the back metal
conductor.
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System optimization. We are also working to
reduce the cost and optimize the effectiveness of the other
components in a photovoltaic system. We maintain a substantial
effort to collect and analyze actual field performance data from
photovoltaic systems that use our modules. We continuously
collect data from internal test sites comprising approximately
10,000 modules installed in varying climates and applications.
We also monitor approximately 457,000 solar modules,
representing approximately 30MW of installed photovoltaic
systems, in use by the end-users that have purchased
photovoltaic systems using our modules. We use the data
collected from these sources to correlate field performance to
various manufacturing and laboratory level metrics, identify
opportunities for module and process improvement and improve the
performance of systems that use our modules. In addition, we use
this data to enhance predictive models and simulations for the
end-users.
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We typically qualify process and product improvements for full
production at our Ohio plant and then utilize our Copy
Smart process to integrate them into our other production
lines. Our scientists and engineers collaborate across all
manufacturing plants to drive improvements. We typically
implement, validate and qualify such improvements at the Ohio
plant before we deploy them to all of our production lines. We
believe that this systematic approach to research and
development will provide continuous improvements and ensure
uniform adoption across our production lines. In addition, our
production lines are replicas of each other using our Copy
Smart process, and as a result, a process or production
improvement on one line can be rapidly validated on other
production lines.
We maintain active collaborations with the National Renewable
Energy Laboratory (a division of the U.S. Department of
Energy), Brookhaven National Laboratory and several
universities. Since 2004, we have
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invested in excess of $29.6 million into our research and
development expenses and received $4.6 million of grant
funding.
Intellectual
Property
Our success depends, in part, on our ability to maintain and
protect our proprietary technology and to conduct our business
without infringing on the proprietary rights of others. We rely
primarily on a combination of patents, trademarks and trade
secrets, as well as employee and third party confidentiality
agreements, to safeguard our intellectual property. As of
December 29, 2007, we held 22 patents in the United States,
which will expire at various times between 2009 and 2023, and
had 25 patent applications pending. We also held 14 patents and
had over 50 patent applications pending in foreign
jurisdictions. Our patent applications and any future patent
applications might not result in a patent being issued with the
scope of the claims we seek, or at all, and any patents we may
receive may be challenged, invalidated or declared
unenforceable. We continually assess appropriate occasions for
seeking patent protection for those aspects of our technology,
designs and methodologies and processes that we believe provide
significant competitive advantages.
As of December 29, 2007, we held two trademarks,
First Solar and First Solar and Design,
in the United States. We have also registered our First
Solar and Design mark in China, Japan and the European
Union and we are seeking registration in India and other
countries.
With respect to proprietary know-how that is not patentable and
processes for which patents are difficult to enforce, we rely
on, among other things, trade secret protection and
confidentiality agreements to safeguard our interests. We
believe that many elements of our photovoltaic manufacturing
process involve proprietary know-how, technology or data that
are not covered by patents or patent applications, including
technical processes, equipment designs, algorithms and
procedures. We have taken security measures to protect these
elements. All of our research and development personnel have
entered into confidentiality and proprietary information
agreements with us. These agreements address intellectual
property protection issues and require our associates to assign
to us all of the inventions, designs and technologies they
develop during the course of employment with us. We also require
our customers and business partners to enter into
confidentiality agreements before we disclose any sensitive
aspects of our solar cells, technology or business plans.
We have not been subject to any material intellectual property
claims.
Competition
The solar energy and renewable energy industries are both highly
competitive and continually evolving as participants strive to
distinguish themselves within their markets and compete within
the larger electric power industry. Within the renewable energy
industry, we compete with other renewable energy technologies
including hydro, wind, geothermal, bio-mass and tidal. Within
the solar energy industry, we believe that our main sources of
competition are crystalline silicon solar module manufacturers,
other thin film solar module manufacturers and companies
developing solar thermal and concentrated photovoltaic
technologies. Among photovoltaic module and cell manufacturers,
the principal methods of competition are price per watt,
production capacity, conversion efficiency and reliability. We
believe that we compete favorably with respect to all of these
factors.
At the end of 2007, the global photovoltaic industry consisted
of more than 100 manufacturers of solar cells and modules.
Within the photovoltaic industry, we face competition from
numerous crystalline silicon solar cell and module
manufacturers. We also face competition from thin film solar
module manufacturers.
In addition, we expect to compete with future entrants to the
photovoltaic industry that offer new technological solutions. We
may also face competition from semiconductor manufacturers and
semiconductor equipment manufacturers or their customers,
several of which have already announced their intention to start
production of photovoltaic cells, solar modules or turnkey
production lines. Some of our competitors are larger and have
greater financial resources, larger production capacities and
greater brand name recognition than we do and may, as a result,
be better positioned to adapt to changes in the industry or the
economy as a whole.
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We also face competition from companies that are developing
various solar thermal solutions for utility scale power plant
applications. In addition to manufacturers of solar photovoltaic
equipment, we face competition from companies developing
concentrating photovoltaic systems and other renewable energy
technologies.
As we develop our business under First Solar Electric and begin
to offer solar electricity solutions to utilities, we expect to
face competition from other providers of renewable energy
solutions, including developers of photovoltaic, solar thermal
and concentrated solar power plants, as well as developers of
alternate forms of renewable energy projects.
Environmental
Matters
Our manufacturing operations include the use, handling, storage,
transportation, generation and disposal of hazardous materials.
We are subject to various federal, state, local and foreign laws
and regulations relating to the protection of the environment,
including those governing the discharge of pollutants into the
air and water, the use, management and disposal of hazardous
materials and wastes, occupational health and safety and the
cleanup of contaminated sites. Therefore, we could incur
substantial costs, including cleanup costs, fines and civil or
criminal sanctions and costs arising from third party property
damage or personal injury claims, as a result of violations of
or liabilities under environmental laws or non-compliance with
environmental permits required at our facilities. We believe we
are currently in substantial compliance with applicable
environmental requirements and do not expect to incur material
capital expenditures for environmental controls in the
foreseeable future. However, future developments such as more
aggressive enforcement policies, the implementation of new, more
stringent laws and regulations, or the discovery of unknown
environmental conditions may require expenditures that could
have a material adverse effect on our business, results of
operations
and/or
financial condition. See Item 1A: Risk
Factors Environmental obligations and liabilities
could have a substantial negative impact on our financial
condition, cash flows and profitability.
Associates
As of December 29, 2007, we had 1,462 associates (our term
for employees), including 1,187 in manufacturing. The remainder
of our associates are in research and development, sales and
marketing and general and administration positions. None of our
associates are represented by labor unions or covered by a
collective bargaining agreement. As we expand domestically and
internationally, however, we may encounter associates who desire
union representation. We believe that our relations with our
associates are good. We expect our headcount to double by the
end of fiscal 2008 given our continued growth and expansion in
Malaysia.
Information
About Geographic Areas
We have significant marketing and distribution operations
outside the United States and, with the completion of our German
plant and construction of our Malaysian manufacturing center, we
expect to have significant manufacturing operations outside the
United States. In 2007, 98.8% of our net sales were generated
from customers headquartered in the European Union. In the
future, we expect to expand our operations in other European
countries beyond Germany, Malaysia and other Asian countries;
and as a result, we will be subject to the legal, political,
social and regulatory requirements, and economic conditions of
many jurisdictions. The international nature of our operations
subject us to a number of risks, including fluctuations in
exchange rates, adverse changes in foreign laws or regulatory
requirements, and tariffs, taxes and other trade restrictions.
See Item 1A: Risk Factors Our substantial
international operations subject us to a number of risks,
including unfavorable political, regulatory, labor and tax
conditions in foreign countries. See also Note 22,
Segment and Geographical Information, to our
consolidated financial statements referenced in Item 15 of
this Annual Report on
Form 10-K
for information about our net sales by geographic region for the
years ended December 29, 2007, December 30, 2006 and
December 31, 2005, and see our Managements Discussion
and Analysis of Financial Condition and Results of Operations in
Item 7 of this Annual Report on
Form 10-K
for other information about our operations and activities in
various geographic regions.
9
Available
Information
We maintain a website at
http://www.firstsolar.com.
We make available free of charge on our website our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after we
electronically file these materials with, or furnish them to,
the SEC. The information contained in or connected to our
website is not incorporated by reference into this report.
The public may also read and copy any materials that we file
with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains reports
and other information regarding issuers, such as First Solar,
that file electronically with the SEC. The SECs Internet
website is located at
http://www.sec.gov.
Executive
Officers of the Registrant
Our executive officers and their ages and positions as of
December 29, 2007 are as follows:
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Name
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Age
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Position
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Michael J. Ahearn
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51
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Chief Executive Officer, Chairman
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Bruce Sohn
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46
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President, Director
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Jens Meyerhoff
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43
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Chief Financial Officer
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Kenneth M. Schultz
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45
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Executive Vice President, Global Marketing & Business
Development
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John T. Gaffney
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47
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Executive Vice President and General Counsel
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I. Paul Kacir
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42
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Vice President, Corporate Secretary
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Michael J. Ahearn has served as the CEO and Chairman of First
Solar since August 2000. Mr. Ahearn also served as
President of First Solar from August 2000 to March 2007. From
1996 until November 2006, he was a Partner and President of the
equity investment firm JWMA Partners, LLC, or JWMA (formerly
True North Partners, L.L.C.). Prior to joining JWMA,
Mr. Ahearn practiced law as a partner in the firm of
Gallagher & Kennedy. He received both a B.A. in
Finance and a J.D. from Arizona State University.
Bruce Sohn was elected a director of First Solar in July 2003
and has served as President of First Solar since March 2007.
Prior to joining First Solar as President, Mr. Sohn worked
at Intel Corporation for 24 years, where he most recently
served as Plant Manager. He is a senior member of IEEE and a
certified Jonah. Mr. Sohn has been a guest lecturer at
several universities, including the Massachusetts Institute of
Technology and Stanford University. He graduated from the
Massachusetts Institute of Technology with a degree in Materials
Science and Engineering.
Jens Meyerhoff joined First Solar in May 2006 as Chief Financial
Officer. Prior to joining First Solar, Mr. Meyerhoff was
the Chief Financial Officer of Virage Logic Corporation, a
provider of embedded memory intellectual property for the design
of integrated circuits, from January 2006 to May 2006.
Mr. Meyerhoff was employed by FormFactor, Inc., a
manufacturer of advanced wafer probe cards, as Chief Operating
Officer from April 2004 to July 2005, Senior Vice President of
Operations from January 2003 to April 2004 and Chief Financial
Officer from August 2000 to March 2005. Prior to joining
FormFactor, Inc., Mr. Meyerhoff was the Chief Financial
Officer and Senior Vice President of Materials at Siliconix
Incorporated, a manufacturer of power and analog semiconductor
devices, from March 1998 to August 2000. Mr. Meyerhoff
holds a German Wirtschaftsinformatiker degree, which is the
equivalent of a Finance and Information Technology degree, from
Daimler Benzs Executive Training Program.
Kenneth M. Schultz joined First Solar in November 2002 and is
our Executive Vice President Global Marketing and Business
Development. Prior to joining First Solar, he was a Vice
President at Intersil Corporation, an analog semiconductor
company, where he was responsible for commercializing various
communications technologies, from October 2000 to June 2002.
Mr. Schultz was Vice President and General Manager at
SiCOM, Inc. prior to the acquisition of SiCOM by Intersil
Corporation in 2000. He holds a B.S. in electrical engineering
from the University of Pittsburgh and received his M.B.A. degree
from Robert Morris University.
10
John T. Gaffney joined First Solar in January 2008 as Executive
Vice President and General Counsel. Prior to joining First
Solar, Mr. Gaffney practiced law at the firm of Cravath,
Swaine & Moore LLP, where he was partner since 1993.
During his time at Cravath, Mr. Gaffney served as a key
advisor to First Solar and advised numerous corporate and
financial institution clients on merger, acquisition and capital
markets transactions. Mr. Gaffney holds a B.A. from George
Washington University and an M.B.A. and J.D. from New York
University.
I. Paul Kacir joined First Solar in October 2006 and is the
Vice President, Corporate Secretary. Prior to joining First
Solar, Mr. Kacir was a partner with the law firm of Gowling
Lafleur Henderson LLP in 2006. From 2000 to 2005, Mr. Kacir
was general counsel for Creo Inc., a manufacturer of digital
pre-press equipment. Before joining Creo, Mr. Kacir
practiced with Lang Michener Lawrence & Shaw.
Mr. Kacir holds a B.A. in economics from the University of
Western Ontario, a L.L.B from the University of New Brunswick,
and an M.B.A. from the University of British Columbia.
An investment in our stock involves a high degree of risk. You
should carefully consider the following information, together
with the other information in this Annual Report on
Form 10-K,
before buying shares of our stock. If any of the following risks
or uncertainties occur, our business, financial condition and
results of operations could be materially and adversely
affected, the trading price of our stock could decline and you
may lose all or a part of the money you paid to buy our stock.
Our
limited operating history may not serve as an adequate basis to
judge our future prospects and results of
operations.
We have a limited operating history. Although we began
developing our predecessor technology in 1987, we did not launch
commercial operations until we qualified our pilot production
line in January 2002. We qualified the first production line at
our Ohio plant in November 2004, the second and third production
lines at our Ohio plant in August 2006 and our German plant in
the third quarter of 2007. Because these production lines have
only been in operation for a limited period of time, our
historical operating results may not provide a meaningful basis
for evaluating our business, financial performance and
prospects. While our net sales grew from $48.1 million in
2005 to $504.0 million in 2007, we may be unable to achieve
similar growth, or grow at all, in future periods. Accordingly,
you should not rely on our results of operations for any prior
period as an indication of our future performance.
Thin
film technology has a short history and our thin film technology
and solar modules may perform below expectations.
Researchers began developing thin film semiconductor technology
over 20 years ago, but were unable to integrate the
technology into a solar module production line until recently.
Our oldest active production line has only been in operation
since November 2004 and the oldest solar modules manufactured
during the qualification of our pilot line have only been in use
since 2001. As a result, our thin film technology and solar
modules do not have a sufficient operating history to confirm
how our solar modules will perform over their estimated
25-year
useful life. We perform a variety of quality and life tests
under different conditions. However, if our thin film technology
and solar modules perform below expectations, we could lose
customers and face substantial warranty expense.
Our
failure to further refine our technology and develop and
introduce improved photovoltaic products could render our solar
modules uncompetitive or obsolete and reduce our net sales and
market share.
We will need to invest significant financial resources in
research and development to keep pace with technological
advances in the solar energy industry. However, research and
development activities are inherently uncertain and we could
encounter practical difficulties in commercializing our research
results. Our significant expenditures on research and
development may not produce corresponding benefits. Other
companies are developing a variety of competing photovoltaic
technologies, including copper indium gallium diselenide and
amorphous silicon, which could produce solar modules that prove
more cost-effective or have better performance than
11
our solar modules. As a result, our solar modules may be
rendered obsolete by the technological advances of our
competitors, which could reduce our net sales and market share.
If
photovoltaic technology is not suitable for widespread adoption,
or if sufficient demand for solar modules does not develop or
takes longer to develop than we anticipate, our net sales may
flatten or decline and we may be unable to sustain
profitability.
The solar energy market is at a relatively early stage of
development and the extent to which solar modules will be widely
adopted is uncertain. If photovoltaic technology proves
unsuitable for widespread adoption or if demand for solar
modules fails to develop sufficiently, we may be unable to grow
our business or generate sufficient net sales to sustain
profitability. In addition, demand for solar modules in our
targeted markets including Germany, Spain, France,
Italy and the United States may not develop or may
develop to a lesser extent than we anticipate. Many factors may
affect the viability of widespread adoption of photovoltaic
technology and demand for solar modules, including the following:
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cost-effectiveness of solar modules compared to conventional and
other non-solar renewable energy sources and products;
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performance and reliability of solar modules and thin film
technology compared to conventional and other non-solar
renewable energy sources and products;
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availability and substance of government subsidies and
incentives to support the development of the solar energy
industry;
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success of other renewable energy generation technologies, such
as hydroelectric, tidal, wind, geothermal, solar thermal,
concentrated photovoltaic, and biomass;
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fluctuations in economic and market conditions that affect the
viability of conventional and non-solar renewable energy
sources, such as increases or decreases in the price of oil and
other fossil fuels;
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fluctuations in capital expenditures by end-users of solar
modules, which tend to decrease when the economy slows and
interest rates increase; and
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deregulation of the electric power industry and the broader
energy industry to permit wide spread adoption of solar
electricity.
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Our
future success depends on our ability to build new manufacturing
plants and add production lines in a cost-effective manner, both
of which are subject to risks and uncertainties.
Our future success depends on our ability to significantly
increase both our manufacturing capacity and production
throughput in a cost-effective and efficient manner. If we
cannot do so, we may be unable to expand our business, decrease
our cost per watt, maintain our competitive position, satisfy
our contractual obligations or sustain profitability. Our
ability to expand production capacity is subject to significant
risks and uncertainties, including the following:
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making changes to our production process that are not properly
qualified or may cause problems with the quality of our solar
modules;
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delays and cost overruns as a result of a number of factors,
many of which may be beyond our control, such as our inability
to secure successful contracts with equipment vendors;
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our custom-built equipment may take longer and cost more to
manufacture than expected and may not operate as designed;
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delays or denial of required approvals by relevant government
authorities;
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being unable to hire qualified staff; and
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failure to execute our expansion plans effectively.
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12
If our
future production lines are not built in line with our committed
schedules or do not achieve operating metrics similar to our
existing production lines, our solar modules could perform below
expectations and cause us to lose customers.
Currently, the production lines at our Ohio and German plants
are our only production lines that have a history of operating
at full capacity. Future production lines could produce solar
modules that have lower efficiencies, higher failure rates and
higher rates of degradation than solar modules from our existing
production lines, and we could be unable to determine the cause
of the lower operating metrics or develop and implement
solutions to improve performance. The second and third
production lines at our Ohio plant, completed in August 2006,
represent a standard building block that we
replicated twice to build the four production lines at our
German plant. We are using the same systematic replication
process to build our Malaysian manufacturing center and future
production facilities, including expansion of our existing
production facilities. Our replication risk in connection with
building production lines at our Malaysian manufacturing center
and other future manufacturing plants could be higher than our
replication risk was in expanding the Ohio plant because these
new production lines are located internationally, which could
entail other factors that will lower their operating metrics. If
we are unable to systematically replicate our production lines
to meet our committed schedules and achieve and sustain similar
operating metrics in our Malaysian manufacturing center and
future production lines as our existing production lines, our
manufacturing capacity could be substantially constrained, our
manufacturing costs per watt could increase, and we could lose
customers, causing lower net sales, higher liabilities and lower
net income than we anticipate. In addition, we might be unable
to produce enough solar modules to satisfy our contractual
requirements under our long term customer contracts.
Some
of our manufacturing equipment is customized and sole sourced.
If our manufacturing equipment fails or if our equipment
suppliers fail to perform under their contracts, we could
experience production disruptions and be unable to satisfy our
contractual requirements.
Some of our manufacturing equipment is customized to our
production lines based on designs or specifications that we
provide the equipment manufacturer, who then undertakes a
specialized process to manufacture the custom equipment. As a
result, the equipment is not readily available from multiple
vendors and would be difficult to repair or replace if it were
to become damaged or stop working. If any piece of equipment
fails, production along the entire production line could be
interrupted and we could be unable to produce enough solar
modules to satisfy our contractual requirements under our long
term customer contracts. In addition, the failure of our
equipment suppliers to supply equipment in a timely manner or on
commercially reasonable terms could delay our expansion plans
and otherwise disrupt our production schedule or increase our
manufacturing costs, all of which would adversely impact our
financial results.
We may
be unable to manage the expansion of our operations
effectively.
We expect to expand our business significantly in order to meet
our contractual obligations, satisfy demand for our solar
modules and increase market share. In August 2006, we expanded
our Ohio plant from one to three production lines. In April
2007, we started initial production at our four line
manufacturing plant in Germany, which reached full capacity in
the third quarter of 2007. Also in April 2007, we began
construction of plant one of our Malaysian manufacturing center.
In the third and fourth quarters of 2007, we began construction
of plants two and three respectively, and in the first quarter
of 2008, we began construction of plant four. Following the
completion of plant four of our Malaysian manufacturing center
we will have grown from one production line to 23 production
lines with an annual global manufacturing capacity of
approximately 1012MW in four years based on the fourth quarter
of 2007 run rate at our existing plants.
To manage the rapid expansion of our operations, we will be
required to improve our operational and financial systems,
procedures and controls and expand, train and manage our growing
associate base. Our management will also be required to maintain
and expand our relationships with customers, suppliers and other
third parties and attract new customers and suppliers. In
addition, our current and planned operations, personnel, systems
and internal procedures and controls might be inadequate to
support our future growth. If we cannot manage our growth
effectively, we may be unable to take advantage of market
opportunities, execute our business strategies or respond to
competitive pressures.
13
We
depend on a limited number of suppliers for key raw materials
and components and their failure to perform could cause
manufacturing delays and impair our ability to deliver solar
modules to customers in the required quality and quantities and
at a price that is profitable to us.
Our failure to obtain raw materials and components that meet our
quality, quantity and cost requirements in a timely manner could
interrupt or impair our ability to manufacture our solar modules
or increase our manufacturing cost. Most of our key raw
materials and components are either sole-sourced or sourced by a
limited number of third-party suppliers. As a result, the
failure of any of our suppliers to perform could disrupt our
supply chain and impair our operations. In addition, many of our
suppliers are small companies that may be unable to supply our
increasing demand for raw materials and components as we
implement our planned rapid expansion. We may be unable to
identify new suppliers or qualify their products for use on our
production lines in a timely manner and on commercially
reasonable terms. Raw materials and components from new
suppliers may also be less suited for our technology and yield
solar modules with lower conversion efficiencies, higher failure
rates and higher rates of degradation than solar modules
manufactured with the raw materials from our current suppliers.
A constraint on our production may cause us to be unable to meet
our obligations under our long term customer contracts, which
would have an adverse impact on our financial results.
A
disruption in our supply chain for cadmium telluride, our
semiconductor material, could interrupt or impair our ability to
manufacture solar modules.
The key raw material we use in our production process is a
cadmium telluride compound, with the tellurium component of the
compound being the most critical. Currently, we purchase most of
our cadmium telluride in manufactured form from a limited number
of suppliers. If our current suppliers or any of our future
suppliers are unable to perform under their contracts or
purchase orders, our operations could be interrupted or
impaired. In addition, because our suppliers must undergo a
lengthy qualification process, we may be unable to replace a
lost supplier in a timely manner and on commercially reasonable
terms. Our supply of cadmium telluride could also be limited if
any of our current suppliers or any of our future suppliers is
unable to acquire an adequate supply of tellurium in a timely
manner or at commercially reasonable prices. If our competitors
begin to use or increase their demand for cadmium telluride,
supply could be reduced and prices could increase. If our
current suppliers or any of our future suppliers cannot obtain
sufficient tellurium, it could substantially increase prices or
be unable to perform under their contracts. We may be unable to
pass increases in the cost of our raw materials through to our
customers because our customer contracts do not adjust for raw
material price increases and are generally for a longer term
than our raw material supply contracts. A reduction in our
production could result in our inability to meet our commitments
under our long term customer contracts, all of which would have
an adverse impact on our financial results.
We
currently depend on a limited number of customers, with six
customers accounting for substantially all of our net sales in
2007. The loss of, or a significant reduction in orders from,
any of these customers could significantly reduce our net sales
and negatively impact our operating results.
We currently sell substantially all of our solar modules to
customers headquartered throughout the European Union. During
2007, our six largest customers each accounted for between 10%
and 23% of our net sales. The loss of any of our large
customers, their inability to perform under their contracts, or
their default in payment could significantly reduce our net
sales and adversely impact our operating results. In addition,
our Long Term Supply Contracts extend through 2012 and we expect
them to allocate a significant amount of our production capacity
to a limited number of customers. As a result, we do not expect
to have a significant amount of excess production capacity to
identify and then build relationships with new customers that
could replace any lost customers, and we will have to rely on
future expansions to attract and service new customers. In
addition, our customer relationships have been developed over a
relatively short period of time and we cannot guarantee that we
will have good relations with our customers in the future.
Several of our competitors have more established relationships
with our customers and may gain a larger share of our
customers business over time.
14
If we
are unable to further increase the number of sellable watts per
solar module and reduce our manufacturing cost per watt, we will
be in default under certain of our Long Term Supply Contracts
and our profitability could decline.
Our Long Term Supply Contracts require either an increase in the
minimum average number of watts per module of approximately 5%
annually from 2008 to 2009 and then by 3% in 2012 or a base
number of watts per module that increases 3-4% annually from
2008 to 2010/2011 and then remains fixed through 2012. Our
failure to achieve these metrics could reduce our profitability
or allow some of our customers to terminate their contracts. In
addition, all of our Long Term Supply Contracts specify a sales
price per watt that declines by approximately 6.5% at the
beginning of each year through the expiration date of each
contract in 2012. Our profitability could decline if we are
unable to reduce our manufacturing cost per watt by at least the
same rate at which our contractual prices decrease. Furthermore,
our failure to reduce cost per watt by increasing our efficiency
may impair our ability to enter new markets that we believe will
require lower cost per watt for us to be competitive and may
impair our growth plans.
Reduced
growth in or the reduction, elimination or expiration of
government subsidies, economic incentives and other support for
on-grid solar electricity applications could reduce demand for
our solar modules, lead to a reduction in our net sales and
adversely impact our operating results.
Reduced growth in or the reduction, elimination or expiration of
government subsidies, economic incentives and other support for
on-grid solar electricity may result in the diminished
competitiveness of solar energy relative to conventional and
non-solar renewable sources of energy, and could materially and
adversely affect the growth of the solar energy industry and our
net sales. We believe that the near-term growth of the market
for on-grid applications, where solar energy is used to
supplement the electricity a consumer purchases from the utility
network, depends significantly on the availability and size of
government subsidies and economic incentives. Currently, the
cost of solar electricity substantially exceeds the retail price
of electricity in every significant market in the world. As a
result, federal, state and local governmental bodies in many
countries, most notably Germany, Italy, Spain, France, Greece,
Portugal, South Korea, Japan, Canada and the United States, have
provided subsidies in the form of feed-in tariffs, rebates, tax
incentives and other incentives to end-users, distributors,
systems integrators and manufacturers of photovoltaic products.
For example, Germany, which accounted for 90.7% of our net sales
in 2007, has been a strong supporter of photovoltaic products
and systems, and political changes in Germany could result in
significant reductions in or the elimination of incentives. Many
of these government incentives expire, phase out over time,
exhaust the allocated funding or require renewal by the
applicable authority. For example, German subsidies decline at a
rate of 5.0% or 6.5% per year (based on the type of the
photovoltaic system) and discussions are ongoing about modifying
the German Renewable Energy Law, or the EEG. The government
proposal for the EEG amendment published on December 5,
2007 provides a one time adjustment of one euro cent per kWh
starting on January 1, 2009 plus a gradual increase of
degression rates for roof systems from currently 5% to 7%
starting 2009 and to 8% starting 2011, and for ground mounted
systems from currently 6.5% to 7% starting 2009 and to 8%
starting 2011. It also recommends the introduction of a new
tariff group for roof systems greater than 1000 kWp with a
feed-in tariff of 34.48 euro cents per kWh in 2009. If the
German government reduces or eliminates the subsidies under the
EEG, demand for photovoltaic products could significantly
decline in Germany.
In Spain, which accounted for approximately 1% of our net sales,
the Spanish Royal Decree currently supports system installations
registered before September 27, 2008. Proposals for a
follow-up
regulation are under discussion, however, a final conclusion is
not expected before March of 2008. If the Spanish government
does not release a new decree before September 27, 2008,
there will be no feed-in tariff for new PV systems installed,
connected or registered after that date.
In the United States, California has been the State where the
majority of solar installations have taken place during the past
five years. Starting January 1, 2007, the California Solar
Initiative (CSI) has established a goal of installing 3000MW of
solar generated electricity by 2017 with a State budget of
$3.3 billion over 10 years. The CSI is structured to
reduce the incentives paid to solar system owners as the
cumulative volume of solar installations reaches pre-determined
threshold limits. For example, the buy-down incentives and
performance based incentives are planned to be reduced by
approximately 50% between a cumulative installed solar capacity
of 100MW and
15
200MW, potentially reducing demand for solar unless system cost
reductions can be achieved. Emerging subsidy programs, such as
the programs in Italy, France, Greece, South Korea and Ontario,
Canada, may require an extended period of time to attain
effectiveness because the applicable permitting and grid
connection processes associated with these programs can be
lengthy and administratively burdensome.
In addition, if any of these statutes or regulations is found to
be unconstitutional, or is reduced or discontinued for other
reasons, sales of our solar modules in these countries could
decline significantly, which could have a material adverse
effect on our business and results of operations. For example,
the predecessor to the German EEG was challenged in Germany on
constitutional grounds and in the European Court of Justice as
impermissible state aid. Although the German Federal High Court
of Justice dismissed these constitutional concerns and the
European Court of Justice held that the purchase requirement at
minimum feed-in tariffs did not constitute impermissible state
aid, new proceedings challenging the Renewable Energies Act or
comparable minimum price regulations in other countries in which
we currently operate or intend to operate may be initiated.
Electric utility companies or generators of electricity from
fossil fuels or other renewable energy sources could also lobby
for a change in the relevant legislation in their markets to
protect their revenue streams. Reduced growth in or the
reduction, elimination or expiration of government subsidies and
economic incentives for on-grid solar energy applications,
especially those in our target markets, could cause our net
sales to decline and materially and adversely affect our
business, financial condition and results of operations.
In the United States, the 30% business and residential
investment tax credit for solar energy systems reverts back to
10% at the end of 2008, unless it is extended. The United States
Congress attempted to extend the 30% investment tax credit
during 2007, but was unsuccessful. If the 30% investment tax
credit is not extended, or not extended by mid-year 2008 or is
only extended for a limited period of time, demand for solar
energy systems in the United States, at prices that are
profitable, could decline.
We
face intense competition from manufacturers of crystalline
silicon solar modules, thin film solar modules and solar thermal
and concentrated photovoltaic systems.
The solar energy and renewable energy industries are both highly
competitive and continually evolving as participants strive to
distinguish themselves within their markets and compete with the
larger electric power industry. We believe that our main sources
of competition are crystalline silicon solar module
manufacturers, other thin film solar module manufacturers and
companies developing solar thermal and concentrated photovoltaic
technologies.
At the end of 2007, the global photovoltaic industry consisted
of over 100 manufacturers of solar cells and modules. Within the
photovoltaic industry, we face competition from crystalline
silicon solar cell and module manufacturers. We also face
competition from established thin film solar module
manufacturers and several crystalline silicon manufacturers who
are developing thin film technologies. We also face competition
from semiconductor manufacturers and semiconductor equipment
manufacturers and numerous startup companies that have attracted
significant funding during 2007 or their customers,
several of which have begun or have already announced their
intention to start production of photovoltaic cells, solar
modules or turnkey production lines. In addition to
manufacturers of solar cells and modules, we face competition
from companies developing solar thermal and concentrated
photovoltaic technologies.
Even if demand for solar modules continues to grow, the rapid
expansion plans of many solar cell and module manufacturers
could create periods where supply exceeds demand. During any
such period, our competitors could decide to reduce their sales
price, even below their manufacturing cost, in order to generate
sales. As a result, we may be unable to sell our solar modules
at attractive prices, or for a profit, during any period of
excess supply of solar modules, which would reduce our net sales
and harm our results of operations.
Many of our existing and potential competitors have
substantially greater financial, technical, manufacturing and
other resources than we do. A competitors greater size
provides them with a competitive advantage because they often
can realize economies of scale and purchase certain raw
materials at lower prices. Many of our competitors also have
greater brand name recognition, more established distribution
networks and larger customer bases. In addition, many of our
competitors have well-established relationships with our current
and potential
16
distributors and have extensive knowledge of our target markets.
As a result of their greater size, some of our competitors may
be able to devote more resources to the research, development,
promotion and sale of their products or respond more quickly to
evolving industry standards and changes in market conditions
than we can. In addition, a significant increase in the supply
of silicon feedstock or a significant reduction in the
manufacturing cost of crystalline silicon solar modules could
lead to pricing pressures for solar modules. Our failure to
adapt to changing market conditions and to compete successfully
with existing or new competitors may materially and adversely
affect our financial condition and results of operations.
Our
substantial international operations subject us to a number of
risks, including unfavorable political, regulatory, labor and
tax conditions in foreign countries.
We have significant marketing and distribution operations
outside the United States and, with the completion of our German
plant and construction of our Malaysian manufacturing center, we
expect to have significant manufacturing operations outside the
United States. In 2007, 98.8% of our net sales were generated
from customers headquartered in the European Union. In the
future, we expect to expand our operations in other European
countries beyond Germany, Malaysia and other Asian countries;
and as a result, we will be subject to the legal, political,
social and regulatory requirements, and economic conditions of
many jurisdictions. Risks inherent to international operations,
include, but are not limited to, the following:
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difficulty in enforcing agreements in foreign legal systems;
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foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs or adopt other
restrictions on foreign trade and investment, including currency
exchange controls;
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fluctuations in exchange rates may affect product demand and may
adversely affect our profitability in U.S. dollars to the
extent the price of our solar modules and cost of raw materials,
labor and equipment is denominated in a foreign currency;
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inability to obtain, maintain or enforce intellectual property
rights;
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risk of nationalization of private enterprises;
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changes in general economic and political conditions in the
countries in which we operate, including changes in the
government incentives we are relying on;
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unexpected adverse changes in foreign laws or regulatory
requirements, including those with respect to environmental
protection, export duties and quotas;
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difficulty with staffing and managing widespread operations;
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trade barriers such as export requirements, tariffs, taxes and
other restrictions and expenses, which could increase the price
of our solar modules and make us less competitive in some
countries; and
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difficulty of and costs relating to compliance with the
different commercial and legal requirements of the overseas
markets in which we offer and sell our solar modules.
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Our business in foreign markets requires us to respond to rapid
changes in market conditions in these countries. Our overall
success as a global business depends, in part, on our ability to
succeed in differing legal, regulatory, economic, social and
political conditions. We may not be able to develop and
implement policies and strategies that will be effective in each
location where we do business. In addition, each of the
foregoing risks is likely to take on increased significance as
we implement our plans to expand our foreign manufacturing
operations.
Problems
with product quality or performance may cause us to incur
warranty expenses, damage our market reputation and prevent us
from maintaining or increasing our market share.
Our solar modules are sold with a five year materials and
workmanship warranty for technical defects and a twenty-five
year warranty against declines of more than 10% of their initial
rated power in the first 10 years following their
installation and 20% of initial rated power in the following
15 years, respectively. As a result, we bear the risk of
extensive warranty claims long after we have sold our solar
modules and recognized net sales. As of December 29, 2007,
our accrued warranty liability was $7.3 million.
17
While our power output warranty extends for twenty-five years,
our oldest solar modules manufactured during the qualification
of our pilot production line have only been in use since 2001.
Because of the limited operating history of our solar modules,
we have been required to make assumptions regarding the
durability and reliability of our solar modules. Our assumptions
could prove to be materially different from the actual
performance of our solar modules, causing us to incur
substantial expense to repair or replace defective solar modules
in the future. For example, our
glass-on-glass
solar modules could break, delaminate or experience power
degradation in excess of expectations. In addition, once our
solar modules are installed, connected and exposed to sunlight,
but before they are connected to a power grid or there is a load
otherwise put on them, they are in an open circuit condition. We
are continuing to collect data on the long-term effects on
reliability and service life that results from extended periods
of the solar modules being in an open circuit condition,
particularly in high ambient temperature conditions. Although
the data available to us to date does not suggest significant
deterioration in long-term performance of solar modules that are
left in a prolonged open circuit condition, it may become
apparent with future experience that the long-term performance
and service life of our solar modules is affected by remaining
in an open circuit condition for prolonged periods of time. Any
widespread product failures may damage our market reputation and
cause our sales to decline and require us to repair or replace
the defective modules, which could have a material adverse
effect on our financial results.
If our
estimates regarding the future cost of collecting and recycling
our solar modules are incorrect, we could be required to accrue
additional expenses at and from the time we realize our
estimates are incorrect and face a significant unplanned cash
burden when our end-users return their solar
modules.
We pre-fund our estimated future obligation for collecting and
recycling our solar modules based on the present value of the
expected future cost of the collecting and recycling process.
This cost includes the cost of packaging the solar module for
transport, the cost of freight from the solar modules
installation site to a recycling center and the material, labor
and capital costs of the recycling process. The related expense
that we recognize in our financial statements also includes an
estimated third-party profit margin and risk rate for such
services. Currently, we base our estimates on our experience
collecting and recycling solar modules that do not pass our
quality control tests and solar modules returned under our
warranty and on our expectations about future developments in
recycling technologies and processes and about economic
conditions at the time the solar modules will be collected and
recycled. If our estimates prove incorrect, we could be required
to accrue additional expenses at and from the time we realize
our estimates are incorrect and also face a significant
unplanned cash burden at the time we realize our estimates are
incorrect or end-users return their solar modules, which could
harm our operating results. In addition, our end-users can
return their solar modules at any time. As a result, we could be
required to collect and recycle our solar modules earlier than
we expect and before recycling technologies and processes
improve.
Our
future success depends on our ability to retain our key
associates and to successfully integrate them into our
management team.
We are dependent on the services of Michael J. Ahearn, our Chief
Executive Officer, Bruce Sohn, our President, Jens Meyerhoff,
our Chief Financial Officer, Ken Schultz, our Executive Vice
President Global Marketing and Business Development, John T.
Gaffney, our Executive Vice President and General Counsel, and
other members of our senior management team. The loss of
Messrs. Ahearn, Sohn, Meyerhoff, Schultz, Gaffney, or any
other member of our senior management team could have a material
adverse effect on us. There is a risk that we will not be able
to retain or replace these key associates. Several of our
current key associates, including Messrs. Ahearn, Sohn,
Meyerhoff, Schultz, and Gaffney are subject to employment
conditions or arrangements that contain post-employment
non-competition provisions. However, these arrangements permit
the associates to terminate their employment with us upon little
or no notice.
If we
are unable to attract, train and retain key personnel, our
business may be materially and adversely affected.
Our future success depends, to a significant extent, on our
ability to attract, train and retain management, operations and
technical personnel. Recruiting and retaining capable personnel,
particularly those with expertise in the photovoltaic industry,
thin film technology and cadmium telluride, are vital to our
success. There is substantial
18
competition for qualified technical personnel and we cannot
assure you that we will be able to attract or retain our
technical personnel. In addition, a significant percentage of
our current management, operations and technical personnel have
stock options that vest in 2008 and it may be more difficult to
retain these individuals after their options vest. If we are
unable to attract and retain qualified associates, our business
may be materially and adversely affected.
Our
failure to protect our intellectual property rights may
undermine our competitive position and litigation to protect our
intellectual property rights or defend against third-party
allegations of infringement may be costly.
Protection of our proprietary processes, methods and other
technology, especially our proprietary vapor transport
deposition process and laser scribing process, is critical to
our business. Failure to protect and monitor the use of our
existing intellectual property rights could result in the loss
of valuable technologies. We rely primarily on patents,
trademarks, trade secrets, copyrights and other contractual
restrictions to protect our intellectual property. As of
December 29, 2007, we held 22 patents in the United States
and 14 patents in select foreign jurisdictions. A majority of
our patents expire at various times between 2009 and 2023. Our
existing patents and future patents could be challenged,
invalidated, circumvented or rendered unenforceable. We have
pending patent applications in the United States and in foreign
jurisdictions. Our pending patent applications may not result in
issued patents, or if patents are issued to us, such patents may
not be sufficient to provide meaningful protection against
competitors or against competitive technologies.
We also rely upon unpatented proprietary manufacturing
expertise, continuing technological innovation and other trade
secrets to develop and maintain our competitive position. While
we generally enter into confidentiality agreements with our
associates and third parties to protect our intellectual
property, such confidentiality agreements are limited in
duration and could be breached and may not provide meaningful
protection for our trade secrets or proprietary manufacturing
expertise. Adequate remedies may not be available in the event
of unauthorized use or disclosure of our trade secrets and
manufacturing expertise. In addition, others may obtain
knowledge of our trade secrets through independent development
or legal means. The failure of our patents or confidentiality
agreements to protect our processes, equipment, technology,
trade secrets and proprietary manufacturing expertise, methods
and compounds could have a material adverse effect on our
business. In addition, effective patent, trademark, copyright
and trade secret protection may be unavailable or limited in
some foreign countries, especially any developing countries into
which we may expand our operations. In some countries we have
not applied for patent, trademark or copyright protection.
Third parties may infringe or misappropriate our proprietary
technologies or other intellectual property rights, which could
have a material adverse effect on our business, financial
condition and operating results. Policing unauthorized use of
proprietary technology can be difficult and expensive. Also,
litigation may be necessary to enforce our intellectual property
rights, protect our trade secrets or determine the validity and
scope of the proprietary rights of others. We cannot assure you
that the outcome of such potential litigation will be in our
favor. Such litigation may be costly and may divert management
attention and other resources away from our business. An adverse
determination in any such litigation will impair our
intellectual property rights and may harm our business,
prospects and reputation. In addition, we have no insurance
coverage against litigation costs and would have to bear all
costs arising from such litigation to the extent we are unable
to recover them from other parties.
We may
be exposed to infringement or misappropriation claims by third
parties, which, if determined adversely to us, could cause us to
pay significant damage awards or prohibit us from the
manufacture and sale of our solar modules or the use of our
technology.
Our success depends largely on our ability to use and develop
our technology and know-how without infringing or
misappropriating the intellectual property rights of third
parties. The validity and scope of claims relating to
photovoltaic technology patents involve complex scientific,
legal and factual considerations and analysis and, therefore,
may be highly uncertain. We may be subject to litigation
involving claims of patent infringement or violation of
intellectual property rights of third parties. The defense and
prosecution of intellectual property suits, patent opposition
proceedings and related legal and administrative proceedings can
be both costly and time consuming and may significantly divert
the efforts and resources of our technical and management
personnel. An
19
adverse determination in any such litigation or proceedings to
which we may become a party could subject us to significant
liability to third parties, require us to seek licenses from
third parties, which may not be available on reasonable terms,
or at all, or pay ongoing royalties, require us to redesign our
solar module, or subject us to injunctions prohibiting the
manufacture and sale of our solar modules or the use of our
technologies. Protracted litigation could also result in our
customers or potential customers deferring or limiting their
purchase or use of our solar modules until the resolution of
such litigation.
Currency
translation and transaction risk may negatively affect our net
sales, cost of sales and gross margins and could result in
exchange losses.
Although our reporting currency is the U.S. dollar, we
conduct our business and incur costs in the local currency of
most countries in which we operate. As a result, we are subject
to currency translation and transaction risk. For example, 95.0%
and 98.8% of our net sales were outside the United States and
denominated in euros for the fiscal year ended December 30,
2006 and December 29, 2007, respectively, and we expect a
large percentage of our net sales to be outside the United
States and denominated in foreign currencies in the future. In
addition, with the expansion of our manufacturing operations
into Germany and our current expansion into Malaysia, our
operating expenses for the plants in these countries will be
denominated in the local currency. Changes in exchange rates
between foreign currencies and the U.S. dollar could affect
our net sales and cost of sales and could result in exchange
gains or losses. For example, the strengthening euro contributed
$43.8 million to our net sales during fiscal 2007 compared
to fiscal 2006. In addition, we incur currency transaction risk
whenever one of our operating subsidiaries enters into either a
purchase or a sales transaction using a different currency from
our reporting currency. For example, our Long Term Supply
Contracts specify fixed pricing in euros through 2012 and do not
adjust for changes in the U.S. dollar to euro exchange
rate. We cannot accurately predict the impact of future exchange
rate fluctuations on our results of operations.
We could also expand our business into emerging markets, many of
which have an uncertain regulatory environment relating to
currency policy. Conducting business in such emerging markets
could cause our exposure to changes in exchange rates to
increase.
An
increase in interest rates or tightening of the supply of
capital by Global Financial Markets could make it difficult for
end-users to finance the cost of a photovoltaic system and could
reduce the demand for our solar modules.
Many of our end-users depend on debt financing to fund the
initial capital expenditure required to purchase and install a
photovoltaic system. As a result, an increase in interest rates
could make it difficult for our end-users to secure the
financing necessary to purchase and install a photovoltaic
system on favorable terms, or at all, and thus lower demand for
our solar modules and reduce our net sales. In addition, we
believe that a significant percentage of our end-users install
photovoltaic systems as an investment, funding the initial
capital expenditure through a combination of equity and debt. An
increase in interest rates could lower an investors return
on investment in a photovoltaic system, or make alternative
investments more attractive relative to photovoltaic systems,
and, in each case, could cause these end-users to seek
alternative investments. A reduction in the supply of
non-recourse project debt financing or tax equity investments
could reduce the number of solar projects that receive financing
and thus lower demand for solar modules.
Existing
regulations and policies and changes to these regulations and
policies may present technical, regulatory and economic barriers
to the purchase and use of photovoltaic products, which may
significantly reduce demand for our solar modules.
The market for electricity generation products is heavily
influenced by foreign, federal, state and local government
regulations and policies concerning the electric utility
industry, as well as policies promulgated by electric utilities.
These regulations and policies often relate to electricity
pricing and technical interconnection of customer-owned
electricity generation. In the United States and in a number of
other countries, these regulations and policies have been
modified in the past and may be modified again in the future.
These regulations and policies could deter end-user purchases of
photovoltaic products and investment in the research and
development of photovoltaic technology. For example, without a
mandated regulatory exception for photovoltaic systems, utility
20
customers are often charged interconnection or standby fees for
putting distributed power generation on the electric utility
grid. These fees could increase the cost to our end-users of
using photovoltaic systems and make them less desirable, thereby
harming our business, prospects, results of operations and
financial condition. In addition, electricity generated by
photovoltaic systems mostly competes with expensive peak hour
electricity, rather than the less expensive average price of
electricity. Modifications to the peak hour pricing policies of
utilities, such as to a flat rate, would require photovoltaic
systems to achieve lower prices in order to compete with the
price of electricity.
We anticipate that our solar modules and their installation will
be subject to oversight and regulation in accordance with
national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and
metering and related matters. It is difficult to track the
requirements of individual states and design equipment to comply
with the varying standards. Any new government regulations or
utility policies pertaining to our solar modules may result in
significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction
in demand for our solar modules.
Environmental
obligations and liabilities could have a substantial negative
impact on our financial condition, cash flows and
profitability.
Our operations involve the use, handling, generation,
processing, storage, transportation and disposal of hazardous
materials and are subject to extensive environmental laws and
regulations at the national, state, local and international
level. These environmental laws and regulations include those
governing the discharge of pollutants into the air and water,
the use, management and disposal of hazardous materials and
wastes, the cleanup of contaminated sites and occupational
health and safety. We have incurred and will continue to incur
significant costs and capital expenditures in complying with
these laws and regulations. In addition, violations of, or
liabilities under, environmental laws or permits may result in
restrictions being imposed on our operating activities or in our
being subjected to substantial fines, penalties, criminal
proceedings, third party property damage or personal injury
claims, cleanup costs or other costs. While we believe we are
currently in substantial compliance with applicable
environmental requirements, future developments such as more
aggressive enforcement policies, the implementation of new, more
stringent laws and regulations, or the discovery of presently
unknown environmental conditions may require expenditures that
could have a material adverse effect on our business, results of
operations and financial condition.
In addition, our products contain cadmium telluride and cadmium
sulfide. Elemental cadmium and certain of its compounds are
regulated as hazardous due to the adverse health effects that
may arise from human exposure. Although the risks of exposure to
cadmium telluride are not believed to be as serious as those
relating to exposure to elemental cadmium, the chemical,
physical and toxicological properties of cadmium telluride have
not been thoroughly investigated and reported. We maintain
engineering controls to minimize associate exposure to cadmium
and require our associates who handle cadmium compounds to
follow certain safety procedures, including the use of personal
protective equipment such as respirators, chemical goggles and
protective clothing. In addition, we believe the risk of
exposure to cadmium or cadmium compounds from our end-products
is limited by the fully encapsulated nature of these materials
in our products, as well as the implementation in 2005 of our
end of life collection and recycling program for our solar
modules. While we believe that these factors and procedures are
sufficient to protect our associates, end-users and the general
public from cadmium exposure, we cannot assure you that human or
environmental exposure to cadmium or cadmium compounds used in
our products will not occur. Any such exposure could result in
future third-party claims against us, as well as damage to our
reputation and heightened regulatory scrutiny of our products,
which could limit or impair our ability to sell and distribute
our products. The occurrence of future events such as these
could have a material adverse effect on our business, financial
condition or results of operations.
The use of cadmium in various products is also coming under
increasingly stringent governmental regulation. Future
regulation in this area could impact the manufacture, sale,
collection, and recycling of cadmium-containing solar modules
and could require us to make unforeseen environmental
expenditures or limit our ability to sell and distribute our
products. For example, the European Union Directive 2002/96/EC
on Waste Electrical and Electronic Equipment, or the WEEE
Directive, requires manufacturers of certain electrical
and electronic equipment to be financially responsible for the
collection, recycling, treatment and disposal of specified
products sold in the European Union. In addition, European Union
Directive 2002/95/EC on the Restriction of the Use of Hazardous
Substances in electrical and electronic equipment, or the
RoHS Directive, restricts the use of certain
hazardous substances, including cadmium, in specified products.
Other jurisdictions are considering adopting similar
21
legislation. Currently, photovoltaic solar modules in general
are not subject to the WEEE or RoHS Directives; however, these
directives allow for future amendments subjecting additional
products to their requirements and the scope, applicability and
the products included in the WEEE and RoHS Directives are
currently being considered and may change. If, in the future,
our solar modules become subject to requirements such as these,
we may be required to apply for an exemption. If we were unable
to obtain an exemption, we would be required to redesign our
solar modules in order to continue to offer them for sale within
the European Union, which would be impractical. Failure to
comply with these directives could result in the imposition of
fines and penalties, the inability to sell our solar modules in
the European Union, competitive disadvantages and loss of net
sales, all of which could have a material adverse effect on our
business, financial condition and results of operations.
The
Estate of John T. Walton and its affiliates have significant
control over us and their interests may conflict with or differ
from your interests as a stockholder.
Our current majority stockholder, the Estate of John T. Walton
and its affiliates, including JCL Holdings, LLC, beneficially
own approximately 45.9% of our outstanding common stock. As a
result, the Estate of John T. Walton and its affiliates have
substantial influence over all matters requiring stockholder
approval, including the election of our directors and the
approval of significant corporate transactions such as mergers,
tender offers and the sale of all or substantially all of our
assets. In addition, our amended and restated certificate of
incorporation and by-laws provide that unless and until the
Estate of John T. Walton, JCL Holdings, LLC, John T.
Waltons surviving spouse, descendants, any entity
(including a trust) that is for the benefit of John T.
Waltons surviving spouse or descendants or any entity
(including a trust) over which any of John T. Waltons
surviving spouse, descendants or siblings has voting or
dispositive power (collectively, the Estate)
collectively owns less than 40% of our common stock then
outstanding, stockholders holding 40% or more of our common
stock then outstanding may call a special meeting of the
stockholders, at which our stockholders could replace our board
of directors. In addition, unless and until the Estate
collectively owns less than 40% of our common stock then
outstanding, stockholder action may be taken by written consent.
The interests of the Estate could conflict with or differ from
your interests as a holder of our common stock. For example, the
concentration of ownership held by the Estate could delay, defer
or prevent a change of control of our company or impede a
merger, takeover or other business combination which you may
view favorably.
We may
not realize the anticipated benefits of past or future
acquisitions, and integration of these acquisitions may disrupt
our business and management.
In November 2007, we acquired Turner Renewable Energy, LLC and
in the future, we may acquire additional companies, products or
technologies. We may not realize the anticipated benefits of an
acquisition and each acquisition has numerous risks. These risks
include the following:
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difficulty in assimilating the operations and personnel of the
acquired company;
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difficulty in effectively integrating the acquired technologies
or products with our current products and technologies;
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difficulty in maintaining controls, procedures and policies
during the transition and integration;
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disruption of our ongoing business and distraction of our
management and employees from other opportunities and challenges
due to integration issues;
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difficulty integrating the acquired companys accounting,
management information and other administrative systems;
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inability to retain key technical and managerial personnel of
the acquired business;
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inability to retain key customers, vendors and other business
partners of the acquired business;
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inability to achieve the financial and strategic goals for the
acquired and combined businesses;
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incurring acquisition-related costs or amortization costs for
acquired intangible assets that could impact our operating
results;
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potential impairment of our relationships with employees,
customers, partners, distributors or third party providers of
technology or products;
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potential failure of the due diligence processes to identify
significant issues with product quality, architecture and
development, or legal and financial liabilities, among other
things;
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potential inability to assert that internal controls over
financial reporting are effective;
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potential inability to obtain, or obtain in a timely manner,
approvals from governmental authorities, which could delay or
prevent such acquisitions; and
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potential delay in customer purchasing decisions due to
uncertainty about the direction of our product offerings.
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Mergers and acquisitions of companies are inherently risky, and
ultimately, if we do not complete the integration of acquired
businesses successfully and in a timely manner, we may not
realize the anticipated benefits of the acquisitions to the
extent anticipated, which could adversely affect our business,
financial condition or results of operations.
If our
goodwill or amortizable intangible assets become impaired we may
be required to record a significant charge to
earnings.
Under accounting principles generally accepted in the United
States of America, we review our amortizable intangible assets
for impairment when events or changes in circumstances indicate
the carrying value may not be recoverable. Goodwill is required
to be tested for impairment at least annually. Factors that may
be considered a change in circumstances indicating that the
carrying value of our goodwill or amortizable intangible assets
may not be recoverable include, a decline in stock price and
market capitalization, future cash flows and slower growth rates
in our industry. Goodwill recorded in connection with the
acquisition of Turner Renewable Energy, LLC in November 2007 was
$33.4 million. We may be required to record a significant
charge to earnings in our financial statements during the period
in which any impairment of our goodwill or amortizable
intangible assets is determined, resulting in an impact on our
results of operations.
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Item 1B:
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Unresolved
Staff Comments
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None.
The following is information concerning our principal properties
as of December 29, 2007:
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Location
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Type
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Principal Use
|
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Square Footage
|
|
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Ownership
|
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Phoenix, Arizona
|
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Office
|
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Corporate headquarters
|
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10,342
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(1)
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Leased
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Perrysburg, Ohio
|
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Office, plant and warehouse
|
|
Manufacturing, product design, engineering, research and
development, distribution
|
|
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425,000
|
|
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Owned
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Perrysburg, Ohio
|
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Office
|
|
Satellite office
|
|
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3,780
|
|
|
Leased
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Denver, Colorado
|
|
Office
|
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Research and development
|
|
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144
|
|
|
Leased
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Bridgewater Township, New Jersey
|
|
Office
|
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Projects business office
|
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8,741
|
|
|
Leased
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Austin, Texas
|
|
Office
|
|
Satellite office
|
|
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300
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|
|
Leased
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Frankfurt/Oder, Germany
|
|
Office, plant and warehouse
|
|
Manufacturing
|
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446,706
|
|
|
Owned
|
Frankfurt/Oder, Germany
|
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Warehouse
|
|
Manufacturing
|
|
|
13,993
|
|
|
Leased
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Mainz, Germany
|
|
Office
|
|
Sales and customer support
|
|
|
9,548
|
|
|
Leased
|
Berlin, Germany
|
|
Office
|
|
Government affairs
|
|
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1,213
|
|
|
Leased
|
Amsterdam, Netherlands
|
|
Office
|
|
Sales and customer support
|
|
|
215
|
|
|
Leased
|
Madrid, Spain
|
|
Office
|
|
Sales and customer support
|
|
|
431
|
|
|
Leased
|
Brüssel, Belgium
|
|
Office
|
|
Sales and customer support
|
|
|
215
|
|
|
Leased
|
Kulim, Malaysia
|
|
Office, plant and warehouse
|
|
Manufacturing
|
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4,305,564
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(2)
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Leased
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(1) |
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On October 18, 2007, we entered into a lease agreement,
which we amended on January 22, 2008, for approximately
39,000 square feet of office space for our corporate
headquarters. We will be terminating our current Phoenix lease
and expect to occupy the new space in the first half of 2008. |
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(2) |
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On January 24, 2007, we entered into a land lease agreement
for the property in Kulim, Malaysia that can accommodate up to
two, four-line plants and includes an option exercisable over
six years which we exercised on November 1,
2007 for an adjacent land site that can accommodate
up to an additional two, four line plants. In April 2007, we
began construction of plant one of our Malaysian manufacturing
center. In the third and fourth quarters of 2007, we began
construction of plants two and three respectively; and in the
first quarter of 2008, we began construction of plant four. |
|
|
Item 3:
|
Legal
Proceedings
|
General
In the ordinary conduct of our business, we are subject to
periodic lawsuits, investigations and claims, including, but not
limited to, routine employment matters. Although we cannot
predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a
party will have a material adverse effect on our business,
results of operations, cash flows or financial condition.
FINRA
Inquiry
On August 1, 2007, we received a letter from the Market
Regulation Department of the Financial Industry Regulatory
Authority (FINRA) requesting certain information in
connection with FINRAs review of trading in our common
stock surrounding our July 9, 2007 announcement of having
entered into new long-term supply contracts. Among other things,
FINRA requested information about all persons who possessed
information about the new long-term supply contracts prior to
our public disclosure, a chronology of all significant events
leading to the execution of the new long-term supply contracts
and a description of our procedures to ensure the
confidentiality of material, non-public information prior to its
public dissemination. The letter states that the inquiry should
not be construed as an indication that FINRA has determined that
any violations of the NASD Conduct Rules or the federal
securities laws have occurred.
On August 24, 2007 we received a second letter from FINRA
requesting copies of the customer contracts that were the
subject of the July 9, 2007 announcement. On
October 11, 2007, we received a third letter from FINRA
stating that, as part of its continuing review, the staff of the
Market Regulation Department had identified certain
individuals and entities in respect of which FINRA was seeking
certain information, including the nature and history of any
relationship between such identified individuals and entities
and those persons who possessed information about the new
long-term supply contracts prior to our public disclosure, and a
statement as to the circumstances under which any knowledge of
our business activities may have been gained by such identified
individuals and entities. Again, the letter stated that the
inquiry should not be construed as an indication that FINRA has
determined that any violations of the NASD Conduct Rules or the
federal securities laws have occurred.
On November 23, 2007, we received a letter from FINRA
requesting certain information in connection with FINRAs
review of trading in our common stock surrounding our
November 7, 2007 announcement of our third quarters
financial results. Among other things, FINRA requested
information about all persons who possessed information about
our financial results prior to our public disclosure, a
chronology of all significant events leading to the release of
our third quarter financial results and a description of our
procedures to ensure the confidentiality of material, non-public
information prior to its public dissemination. The letter states
that the inquiry should not be construed as an indication that
FINRA has determined that any violations of the NASD Conduct
Rules or the federal securities laws have occurred.
On February 11, 2008, we received a letter from FINRA
stating that, as part of its continuing review, the staff of the
Market Regulation Department had identified certain
individuals and entities in respect of which FINRA was seeking
certain information, including the nature and history of any
relationship between such identified individuals and entities
and those persons who possessed information about the
November 7, 2007 announcement of our third
24
quarters financial results prior to our public disclosure,
and a statement as to the circumstances under which any
knowledge or business activities may have been gained by such
identified individuals and entities. Again, the letter stated
that the inquiry should not be construed as an indication that
FINRA has determined that any violations of the NASD Conduct
Rules or federal securities laws have occurred. We continue to
cooperate with FINRA and are not aware of any inappropriate
disclosure or improper trading.
|
|
Item 4:
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5:
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock has been listed on The NASDAQ Global Market
under the symbol FSLR since November 17, 2006.
Prior to this time, there was no public market for our common
stock. The following table sets forth the range of high and low
sales prices per share as reported on The NASDAQ Global Market
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Second Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
$
|
30.00
|
|
|
$
|
23.50
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
59.88
|
|
|
$
|
27.54
|
|
Second Quarter
|
|
$
|
91.10
|
|
|
$
|
52.08
|
|
Third Quarter
|
|
$
|
123.21
|
|
|
$
|
74.77
|
|
Fourth Quarter
|
|
$
|
283.00
|
|
|
$
|
119.91
|
|
The closing sales price of our common stock on The NASDAQ Global
Market was $211.94 per share on February 19, 2008. As of
February 19, 2008 there were approximately 31 record
holders of our common stock. This figure does not reflect the
beneficial ownership of shares held in nominee names.
Dividend
Policy
We have never paid, and it is our present intention for the
foreseeable future not to pay, dividends on our common stock.
The declaration and payment of dividends is subject to the
discretion of our Board of Directors and depends on various
factors, including our net income, financial conditions, cash
requirements, future prospects and other factors deemed relevant
by our Board of Directors.
Use of
Proceeds from the Follow-on Offering
On August 15, 2007, we received net proceeds from our
offering of our common stock after deducting
underwriting discounts and commissions and other estimated
offering expenses payable by us of approximately
$366.0 million. We intend to use the net proceeds from the
offering to build plants two through four at our Malaysian
manufacturing center; which will increase the annual
manufacturing capacity of our Malaysian manufacturing center to
sixteen production lines, fund the associated production
start-up and
ramp-up
costs, while the remainder will be utilized for working capital
and general corporate purposes, including possible future
capacity expansions.
25
Equity
Compensation Plans
The following table sets forth certain information, as of
December 29, 2007, concerning securities authorized for
issuance under all equity compensation plans of our company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of Securities
|
|
|
|
|
|
for Future Issuance
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
Upon Exercise of
|
|
|
Price of
|
|
|
Compensation
|
|
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
and Rights(a)(1)
|
|
|
and Rights(b)(2)
|
|
|
Reflected in Column(a))(c)
|
|
|
Equity Compensation plans approved by our stockholders(3)
|
|
|
4,803,679
|
|
|
$
|
10.09
|
|
|
|
5,694,825
|
|
Equity compensation plans not approved by our stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,803,679
|
|
|
$
|
10.09
|
|
|
|
5,694,825
|
|
|
|
|
(1) |
|
Includes 301,588 shares issuable upon vesting of RSUs
granted under the 2006 Omnibus Incentive Compensation Plan. The
remaining balance consists of outstanding stock option grants. |
|
(2) |
|
The weighted average exercise price does not take into account
the shares issuable upon vesting of outstanding RSUs, which have
no exercise price. |
|
(3) |
|
Includes our 2003 Unit Option Plan and 2006 Omnibus Incentive
Compensation Plan. |
26
Stock
Price Performance Graph
The following graph compares the cumulative
13-month
total return attained by shareholders on First Solar,
Inc.s common stock relative to the cumulative total
returns of the S&P 500 index, the NASDAQ Clean Edge
U.S. index and the Russell 2000 index. An investment of
$100 (with reinvestment of all dividends) is assumed to have
been made in our common stock and in each index on
November 17, 2006 and its relative performance is tracked
through December 29, 2007. No cash dividends have been
declared on shares of our common stock. This performance graph
is not soliciting material, is not deemed filed with
the SEC and is not to be incorporated by reference in any filing
by us under the Securities Act of 1933, as amended (the
Securities Act), or the Exchange Act, whether made
before or after the date hereof and irrespective of any general
incorporation language in any such filing. The stock price
performance shown on the graph represents past performance and
should not be considered an indication of future price
performance.
COMPARISON
OF 13 MONTH CUMULATIVE TOTAL RETURN*
Among
First Solar, Inc., The S&P 500 Index,
The Russell 2000 Index And The Nasdaq Clean Edge U.S. Index
*$100 invested on 11/17/06 in stock or 10/31/06 in
index-including reinvestment of dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 2006
|
|
|
Dec. 2006
|
|
|
Mar. 2007
|
|
|
Jun. 2007
|
|
|
Sep. 2007
|
|
|
Dec. 2007
|
First Solar, Inc.
|
|
|
|
100.00
|
|
|
|
|
120.61
|
|
|
|
|
210.23
|
|
|
|
|
360.91
|
|
|
|
|
475.91
|
|
|
|
|
1079.79
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
101.40
|
|
|
|
|
102.05
|
|
|
|
|
108.46
|
|
|
|
|
110.66
|
|
|
|
|
106.97
|
|
Russell 2000
|
|
|
|
100.00
|
|
|
|
|
100.33
|
|
|
|
|
102.29
|
|
|
|
|
106.80
|
|
|
|
|
103.50
|
|
|
|
|
98.76
|
|
NASDAQ Clean Edge U.S.
|
|
|
|
100.00
|
|
|
|
|
99.55
|
|
|
|
|
114.40
|
|
|
|
|
129.30
|
|
|
|
|
143.48
|
|
|
|
|
182.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
27
Recent
Sales of Unregistered Securities
During 2007, we sold unregistered securities to a limited number
of persons, as described below. None of these transactions
involved any underwriters or any public offerings and we believe
that each of these transactions was exempt from registration
requirements. The recipients of the securities in these
transactions represented their intention to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and
instruments issued in these transactions.
On November 30, 2007 we acquired 100% of the outstanding
membership interests of Turner Renewable Energy, LLC
(TRE). In connection with this acquisition, we
issued an aggregate of 118,346 unregistered shares of our
common stock to the members of TRE in satisfaction of a portion
of the total purchase price of $34.3 million (excluding
exit and transaction costs of $0.7 million), of which
$6.3 million was paid in cash. The issuance of our shares
was made in reliance upon an exemption from the registration
requirements of the Securities Act of 1933, as amended (the
Securities Act), provided by Regulation D. The
members who received shares made representations to us as to
their accredited investor status and as to their investment
intent and financial sophistication. The shares are subject to
certain restrictions on transfer, including a restriction on
transfer absent compliance with Regulation D or other
available exemption from our registration under the Securities
Act.
Purchases
of Equity Securities by the Issuer and Affiliate
Purchases
None.
|
|
Item 6:
|
Selected
Consolidated Financial Data
|
The following table sets forth our selected consolidated
financial data for the periods and at the dates indicated. First
Solar US Manufacturing, LLC cancelled substantially all of its
minority membership units in January 2003, leaving it as a
single-member limited liability company.
The selected consolidated financial information for the fiscal
years ended December 29, 2007, December 30, 2006 and
December 31, 2005 have been derived from the audited
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
The selected consolidated financial data for the fiscal years
ended December 25, 2004 and December 27, 2003 have
been derived from the audited consolidated financial statements
not included in this Annual Report on
Form 10-K.
The information presented below should be read in conjunction
with Item 7: Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and the related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
Dec 29,
|
|
|
Dec 30,
|
|
|
Dec 31,
|
|
|
Dec 25,
|
|
|
Dec 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
503,976
|
|
|
$
|
134,974
|
|
|
$
|
48,063
|
|
|
$
|
13,522
|
|
|
$
|
3,210
|
|
Cost of sales
|
|
|
252,573
|
|
|
|
80,730
|
|
|
|
31,483
|
|
|
|
18,851
|
|
|
|
11,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
251,403
|
|
|
|
54,244
|
|
|
|
16,580
|
|
|
|
(5,329
|
)
|
|
|
(8,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,107
|
|
|
|
6,361
|
|
|
|
2,372
|
|
|
|
1,240
|
|
|
|
3,841
|
|
Selling, general and administrative
|
|
|
82,248
|
|
|
|
33,348
|
|
|
|
15,825
|
|
|
|
9,312
|
|
|
|
11,981
|
|
Production
start-up
|
|
|
16,867
|
|
|
|
11,725
|
|
|
|
3,173
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
137,181
|
|
|
|
2,810
|
|
|
|
(4,790
|
)
|
|
|
(16,781
|
)
|
|
|
(24,107
|
)
|
Foreign currency gain (loss)
|
|
|
1,881
|
|
|
|
5,544
|
|
|
|
(1,715
|
)
|
|
|
116
|
|
|
|
|
|
Interest income
|
|
|
20,413
|
|
|
|
2,648
|
|
|
|
316
|
|
|
|
131
|
|
|
|
|
|
Interest expense, net
|
|
|
(2,294
|
)
|
|
|
(1,023
|
)
|
|
|
(418
|
)
|
|
|
(100
|
)
|
|
|
(3,974
|
)
|
Other (expense) income
|
|
|
(1,219
|
)
|
|
|
(799
|
)
|
|
|
56
|
|
|
|
(137
|
)
|
|
|
38
|
|
Income tax benefit (expense)
|
|
|
2,392
|
|
|
|
(5,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
158,354
|
|
|
|
3,974
|
|
|
|
(6,551
|
)
|
|
|
(16,771
|
)
|
|
|
(28,043
|
)
|
Cumulative effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
Dec 29,
|
|
|
Dec 30,
|
|
|
Dec 31,
|
|
|
Dec 25,
|
|
|
Dec 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income (loss)
|
|
$
|
158,354
|
|
|
$
|
3,974
|
|
|
$
|
(6,462
|
)
|
|
$
|
(16,771
|
)
|
|
$
|
(28,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.12
|
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
74,701
|
|
|
|
56,310
|
|
|
|
48,846
|
|
|
|
43,198
|
|
|
|
36,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
2.03
|
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
77,971
|
|
|
|
58,255
|
|
|
|
48,846
|
|
|
|
43,198
|
|
|
|
36,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
Dec 29,
|
|
|
Dec 30,
|
|
|
Dec 31,
|
|
|
Dec 25,
|
|
|
Dec 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
205,951
|
|
|
$
|
(576
|
)
|
|
$
|
5,040
|
|
|
$
|
(15,185
|
)
|
|
$
|
(22,228
|
)
|
Net cash used in investing activities
|
|
|
(547,250
|
)
|
|
|
(159,994
|
)
|
|
|
(43,832
|
)
|
|
|
(7,790
|
)
|
|
|
(15,224
|
)
|
Net cash provided by financing activities
|
|
|
430,421
|
|
|
|
451,550
|
|
|
|
51,663
|
|
|
|
22,900
|
|
|
|
39,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
Dec 29,
|
|
|
Dec 30,
|
|
|
Dec 31,
|
|
|
Dec 25,
|
|
|
Dec 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
404,264
|
|
|
$
|
308,092
|
|
|
$
|
16,721
|
|
|
$
|
3,465
|
|
|
$
|
3,727
|
|
Accounts receivable, net
|
|
|
18,165
|
|
|
|
27,123
|
|
|
|
882
|
|
|
|
4,125
|
|
|
|
1,907
|
|
Inventories
|
|
|
40,204
|
|
|
|
16,510
|
|
|
|
6,917
|
|
|
|
3,686
|
|
|
|
1,562
|
|
Property, plant and equipment, net
|
|
|
430,104
|
|
|
|
178,868
|
|
|
|
73,778
|
|
|
|
29,277
|
|
|
|
23,699
|
|
Total assets
|
|
|
1,371,312
|
|
|
|
578,510
|
|
|
|
101,884
|
|
|
|
41,765
|
|
|
|
31,575
|
|
Total liabilities
|
|
|
274,045
|
|
|
|
116,844
|
|
|
|
63,490
|
|
|
|
19,124
|
|
|
|
11,019
|
|
Accrued collection and recycling liabilities
|
|
|
13,079
|
|
|
|
3,724
|
|
|
|
917
|
|
|
|
|
|
|
|
|
|
Current debt
|
|
|
39,309
|
|
|
|
19,650
|
|
|
|
20,142
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
68,856
|
|
|
|
61,047
|
|
|
|
28,581
|
|
|
|
13,700
|
|
|
|
8,700
|
|
Total stockholders equity
|
|
|
1,097,267
|
|
|
|
411,440
|
|
|
|
13,129
|
|
|
|
22,641
|
|
|
|
20,556
|
|
|
|
Item 7:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and the
related notes included elsewhere in this Annual Report on
Form 10-K.
In addition to historical consolidated financial information,
the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions as
described under the Cautionary Statement Concerning
Forward-Looking Statements, that appears earlier in this
Annual Report on
Form 10-K.
Our actual results could differ materially from those
anticipated by these forward-looking statements as a result of
many factors, including those discussed under
Item 1A: Risk Factors and elsewhere in this
Annual Report on
Form 10-K.
29
Overview
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. Each solar module uses a thin layer of cadmium
telluride semiconductor material to convert sunlight into
electricity. We manufacture our solar modules on high-throughput
production lines and we perform all manufacturing steps
ourselves in an automated, proprietary, continuous process. In
2006 and 2007, we sold most of our solar modules to solar
project developers and system integrators headquartered in
Germany.
Currently, we manufacture our solar modules at our Perrysburg,
Ohio and Frankfurt/Oder, Germany manufacturing facilities and
conduct our research and development activities at our
Perrysburg, Ohio manufacturing facility. We completed the
qualification of the first production line at our Perrysburg,
Ohio plant for high volume production in November 2004. During
2005, the first full year this production line operated at high
volume production, we reduced our average manufacturing cost per
watt to $1.59, from $2.94 in 2004. Our average manufacturing
cost per watt decreased further to $1.40 in 2006 and to $1.23 in
2007, when we had both plants operating at high volume
production. We define average manufacturing cost per watt as the
total manufacturing cost incurred during the period divided by
the total watts produced during the period. By continuing to
expand production globally and improve our technology and
manufacturing process, we believe that we can further reduce our
manufacturing costs per watt. Our objective is to become, by
2010, the first solar module manufacturer to offer a solar
electricity solution that generates electricity on a
non-subsidized basis at a price equal to the price of retail
electricity in key markets in North America, Europe and Asia.
First Solar was founded in 1999 to bring an advanced thin film
semiconductor process into commercial production through the
acquisition of predecessor technologies and the initiation of a
research, development and production program that allowed us to
improve upon the predecessor technologies and launch commercial
operations in January 2002. From January 2002 to the end of
2005, we sold approximately 28MW of solar modules. During 2006
and 2007, we sold approximately 56MW and 201MW of solar modules,
respectively.
On February 22, 2006, we were incorporated as a Delaware
corporation. Prior to that date, we operated as a Delaware
limited liability company.
On November 30, 2007, we completed the acquisition of
Turner Renewable Energy, LLC, a privately held company which
designed and deployed commercial solar projects for utilities
and Fortune 500 companies in the United States. Starting in
December 2007, we operate this wholly owned subsidiary under the
name of First Solar Electric, LLC. We believe the acquisition of
Turner Renewable Energy, LLC will enable us to develop solar
electricity solutions for utility companies in the United States
that are seeking cost effective renewable energy solutions for
the purpose of meeting renewable portfolio standard
requirements. The total consideration for the transaction was
$34.3 million (excluding exit and transaction costs of
$0.7 million), consisting of $28.0 million in common
stock and $6.3 million in cash (see Note 5).
Our fiscal year ends on the Saturday on or before
December 31. All references to fiscal year 2007 relate to
the 52 weeks ended December 29, 2007; all references
to fiscal year 2006 relate to the 52 weeks ended
December 30, 2006; and all references to fiscal year 2005
relate to the 53 weeks ended December 31, 2005. We use
a 13 week fiscal quarter.
Manufacturing
Capacity
We commenced low volume commercial production of solar modules
with our pilot production line in Perrysburg, Ohio in January
2002. During 2003 and 2004, while continuing to sell solar
modules manufactured on our pilot line, we designed and built
our first replicable, high-throughput production line at the
Ohio plant. We ultimately merged most of the equipment from the
pilot line into this first production line, completing its
qualification for full volume production in November 2004. In
February 2005, we commenced construction of two additional
production lines at our Ohio plant. We completed the
qualification of these two additional production lines for full
volume production in August 2006. During the construction of
these two production lines, we improved certain aspects of our
first production line, including the building design and layout
and the design and manufacture of certain production equipment.
Our two-line Ohio expansion represents a standard building
block
30
for building future production facilities or expansions of our
existing production facilities. Our Ohio plant currently has an
annual manufacturing capacity of 132MW based on the fourth
quarter of 2007 average run rate.
In February 2006, we commenced construction of our German plant,
a new manufacturing facility located in Frankfurt/Oder in the
State of Brandenburg that houses four production lines. We
completed the qualification of these four additional production
lines for full volume production in the third quarter of 2007.
In addition, on January 24, 2007 we entered into a land
lease agreement for a manufacturing center site in the Kulim
Hi-Tech Park in the State of Kadah, Malaysia. The Malaysia site
can accommodate two four- line plants. On November 1, 2007,
we exercised an option to lease an adjacent land site that can
accommodate an additional two four- line plants. As of
December 29, 2007, we do not have any more options to lease
more land in Malaysia. In April 2007, we began construction of
plant one of our Malaysian manufacturing center. In the third
and fourth quarters of 2007, we began construction of plants two
and three, respectively; and in the first quarter of 2008, we
began construction of plant four. We expect plant one to reach
its full capacity in the second half of 2008; plant two to reach
its full capacity in the first half of 2009; and plants three
and four to reach full capacity in the second half of 2009.
After plant four of our Malaysian manufacturing center reaches
its full capacity, we will have 23 production lines and an
annual global manufacturing capacity of approximately 1012MW
based on the fourth quarter of 2007 run rate at our existing
plants.
The following table summarizes our current and in-process
production capacity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Production
|
|
|
Date Qualification
|
|
|
|
|
|
|
Number of
|
|
|
Capacity of
|
|
|
Completed for
|
|
|
|
|
|
|
Production
|
|
|
Manufacturing
|
|
|
Full Volume
|
|
|
|
|
Manufacturing Facility
|
|
Lines
|
|
|
Facility(4)
|
|
|
Production
|
|
|
|
|
|
Ohio plant
|
|
|
3
|
|
|
|
132MW
|
|
|
|
August 2006
|
(1)
|
|
|
|
|
German plant
|
|
|
4
|
|
|
|
176MW
|
|
|
|
Third quarter of 2007
|
(2)
|
|
|
|
|
Malaysia plant I
|
|
|
4
|
|
|
|
176MW
|
|
|
|
Second half of 2008
|
(3)
|
|
|
|
|
Malaysia plant II
|
|
|
4
|
|
|
|
176MW
|
|
|
|
First half of 2009
|
(3)
|
|
|
|
|
Malaysia plant III
|
|
|
4
|
|
|
|
176MW
|
|
|
|
Second half of 2009
|
(3)
|
|
|
|
|
Malaysia plant IV
|
|
|
4
|
|
|
|
176MW
|
|
|
|
Second half of 2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current and planned
|
|
|
23
|
|
|
|
1012MW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We completed the qualification for full volume production of the
first production line at our Ohio plant in November 2004 and the
second and third production lines in August 2006. |
|
(2) |
|
We completed the qualification for full volume production of all
four production lines at our German plant in the third quarter
of 2007. |
|
(3) |
|
Anticipated date for full volume production. |
|
(4) |
|
Based on the fourth quarter of 2007 run rate at our existing
plants. |
Financial
Operations Overview
The following describes certain line items in our statement of
operations and some of the factors that affect our operating
results.
Net
Sales
We generate substantially all of our net sales from the sale of
solar modules. Over the past four years, the main constraint
limiting our sales has been production capacity as customer
demand has exceeded the number of solar modules we could
produce. We price and sell our solar modules per watt of power.
For example, during 2007 our average sales price was $2.48 per
watt based on a weighted annual average foreign exchange of
$1.39/1.00. As a result, our net sales can fluctuate based
on our output of sellable watts. We currently sell almost all of
our solar modules to solar project developers and system
integrators headquartered in Germany, France and Spain, which
then resell our solar modules to end-users who receive
government subsidies. The majority of our sales are denominated
in foreign currency and subject to the fluctuation of the
exchange rate between the euro and U.S. dollar.
31
For example, the strengthening of the euro contributed
$43.8 million to our net sales during fiscal 2007 compared
to fiscal 2006. Our net sales could be negatively impacted if
legislation reduces the current subsidy programs in Europe,
North America or Asia or if interest rates increase, which could
impact our end-users ability to either meet their target
return on investment or finance their projects.
In April 2006, we entered into long-term contracts for the
purchase and sale of our solar modules with six European project
developers and system integrators, and in 2007, we entered into
additional long-term contracts for the purchase and sale of our
solar modules with six European project developers that also own
and operate renewable energy projects (collectively, the
Long Term Supply Contracts). These contracts account
for a significant portion of our planned production over the
period from 2008 through 2012 and therefore will significantly
affect our overall financial performance. Our Long Term Supply
Contracts in the aggregate allow for approximately
4.5 billion ($5.9 billion at an assumed exchange
rate of $1.30/1.00) in sales from 2008 to 2012 for the
sale of a total of 3.2GW of solar modules.
Our Long Term Supply Contracts entered into in 2006 require us
to deliver solar modules each year that, in total, meet or
exceed a specified minimum average number of watts per module
for the year. Under these Long Term Supply Contracts, we are
required to increase the minimum average number of watts per
module by approximately 5% annually from 2008 to 2009 and then
by 3% for modules delivered in 2012. If we are unable to meet
the minimum average annual number of watts per module in a given
year, we will be in breach of the applicable agreements,
entitling our customers to certain remedies, potentially
including the right to terminate their Long Term Supply
Contracts. Our Long Term Supply Contracts entered into in 2007
do not require a minimum average number of watts per module but
provide for a base number of watts per module that increases
3-4% annually from 2008 to 2010/2011, and then remains fixed
through 2012, and contain a price adjustment per watt if the
watts delivered per module are higher or lower than the base
number of watts per module. All of our Long Term Supply
Contracts specify a sales price per watt that declines by
approximately 6.5% at the beginning of each year through the
expiration date of the contracts in 2012. Because the sales
prices under our Long Term Supply Contracts are fixed and have
the built-in decline each year, we cannot pass along any
increases in manufacturing costs to these customers. Although we
believe that our total manufacturing costs per watt will decline
at the same rate or more rapidly than our prices under the Long
Term Supply Contracts, our failure to achieve our manufacturing
cost per watt targets could result in a reduction of our gross
margin. The annual 6.5% decline in the sales price under the
Long Term Supply Contracts will reduce our net sales by
approximately 5-6% each year, assuming that the rated power of
our solar modules remains flat, and will impact our cash flow
accordingly. As a result, our profitability could decline if we
are unable to reduce our manufacturing cost per watt by at least
the same rate as the contractual sales prices decrease.
Furthermore, the sales prices under the Long Term Supply
Contracts are denominated in euros, exposing us to risks from
currency exchange rate fluctuations.
Under our customer contracts, starting in April 2006, we
transfer title and risk of loss to the customer and recognize
revenue upon shipment. Under our customer contracts in effect
prior to April 1, 2006, we did not transfer title or risk
of loss, or recognize revenue, until the solar modules were
received by our customers. Our customers do not have extended
payment terms or rights of return under these contracts.
Under our Long Term Supply Contracts we have the right to
terminate certain Long Term Supply Contracts upon 12 months
notice, and the payment of a termination fee if we determine
that certain material adverse changes have occurred, including,
depending on the contract one or more of the following: new
laws, rules or regulations with respect to our production,
distribution, installation or collection and recycling program
have a substantial adverse impact on our business; unanticipated
technical or operational issues result in our experiencing
widespread, persistent quality problems or the inability to
achieve stable conversion efficiencies at planned levels; or
extraordinary events beyond our control substantially increase
the cost of our labor, materials or utility expenses or
significantly reduce our throughput. The average termination fee
under those agreements is 3.6 million
($4.7 million at an assumed exchange rate of
$1.30/1.00).
Our customers are entitled to certain remedies in the event of
missed deliveries of kilowatt volume. These delivery commitments
are established through rolling four quarter forecasts that are
agreed to with each of the customers within the parameters
established in the Long Term Supply Contracts and define the
specific quantities to be purchased on a quarterly basis and the
schedules of the individual shipments to be made to the
customers. In the
32
case of a late delivery, certain of our customers are entitled
to a maximum charge representing a percentage of the delinquent
revenue. If we do not meet our annual minimum volume shipments,
our customers also have the right to terminate these contracts
on a prospective basis.
The information about our Long Term Supply Contracts in the
preceding paragraphs is intended to summarize the financial
terms of the Long Term Supply Contracts and is not intended to
provide guidance about our future operating results, including
revenues or profitability.
With our acquisition of Turner Renewable Energy, LLC on
November 30, 2007, a small portion of our revenues have
been accounted for using the percent of completion method of
accounting. Revenues for First Solar Electric, LLC for fiscal
December 2007 were $3.7 million and not material to our
consolidated results of operations.
No single customer accounted for more than 23% of our net sales
in 2007.
Cost
of sales
Our cost of sales includes the cost of raw materials and
components, such as tempered back glass, TCO coated front glass,
cadmium telluride, laminate, connector assemblies and laminate
edge seal and others. Our total material cost per solar module
has been stable over the past three years, even though the cost
of tellurium, a component of cadmium telluride, increased by
approximately three times from 2003 to 2007. The increase in the
cost of tellurium did not have a significant impact on our total
raw material cost per solar module because raw tellurium
represents a relatively small portion of our overall material
and manufacturing costs. Historically, we have not entered into
long term supply contracts with fixed prices for our raw
materials. Starting in 2006, however, we entered into multi-year
tellurium and CadTel supply contracts in order to mitigate
potential cost volatility and secure raw material supplies. We
expect our raw material cost per watt to decrease over the next
several years as costs per solar module remain stable and
sellable watts per solar module increase.
Other items contributing to our cost of sales are direct labor
and manufacturing overhead such as engineering expense,
equipment maintenance, environmental health and safety, quality
and production control and procurement. Cost of sales also
includes depreciation of manufacturing plant and equipment and
facility related expenses. In addition, we accrue warranty and
end of life collection and recycling expenses to our cost of
sales.
We implemented a program in 2005 to collect and recycle our
solar modules after their use. Under our collection and
recycling program, we enter into an agreement with the end-users
of the photovoltaic systems that use our solar modules. In the
agreement, we commit, at our expense, to remove the solar
modules from the installation site at the end of their life and
transport them to a processing center where the solar module
materials and components will be either refurbished and resold
as used panels or recycled to recover some of the raw materials.
In return, the owner agrees not to dispose of the solar modules
except through our collection and recycling program or another
program that we approve, and the photovoltaic system owner is
responsible for disassembling the solar modules and packaging
them in containers that we provide. At the time we sell a solar
module, we record an expense in cost of sales equal to the
present value of the estimated future end of life obligation. We
record the accretion expense on this future obligation to
selling, general and administrative expense.
Overall, we expect our cost of sales per watt to decrease over
the next several years due to an increase of sellable watts per
solar module, an increase in unit output per line, geographic
diversification into lower-cost manufacturing regions and more
efficient absorption of fixed costs driven by economies of scale.
Gross
profit
Gross profit is affected by numerous factors, including our
average selling prices, foreign exchange rates, our
manufacturing costs and the effective utilization of our
production facilities. For example, our Long Term Supply
Contracts specify a sales price per watt that declines
approximately 6.5% at the beginning of each year. Another factor
impacting gross profits is the ramp of production on new plants
due to a reduced ability to absorb fixed costs until full
production volumes are reached. As a result, gross profits may
vary from quarter to quarter and year to year.
33
Research
and development
Research and development expense consists primarily of salaries
and personnel-related costs and the cost of products, materials
and outside services used in our process and product research
and development activities. We continuously add equipment for
further process developments and record the depreciation of such
equipment as research and development expense. We may also
allocate a portion of the annual operating cost of the Ohio
expansion to research and development expense.
We maintain a number of programs and activities to improve our
technology in order to enhance the performance of our solar
modules and of our manufacturing processes. We maintain active
collaborations with the National Renewable Energy Laboratory (a
division of the United States Department of Energy), Brookhaven
National Laboratory and several universities. We report our
research and development expense net of grant funding. During
the past three years, we received grant funding that we applied
towards our research and development programs. We received
$0.9 million during each of the fiscal years 2005 and 2006
and $1.8 million during 2007. We expect our research and
development expense to increase in absolute terms in the future
as we increase personnel and research and development activity.
Over time, we expect research and development expense to decline
as a percentage of net sales and on a cost per watt basis as a
result of economies of scale.
Deferred
Project Costs
Deferred project costs represent uninstalled materials relating
to customer contracts. These costs are recognized as deferred
assets until installed. Deferred project costs as of
December 29, 2007 were $2.6 million.
Selling,
general and administrative
Selling, general and administrative expense consists primarily
of salaries and other personnel-related costs, professional
fees, insurance costs, travel expense and other selling
expenses. We expect these expenses to increase in the near term,
both in absolute dollars and as a percentage of net sales, in
order to support the growth of our business as we expand our
sales and marketing efforts, improve our information processes
and systems and implement the financial reporting, compliance
and other infrastructure required for a public company. Over
time, we expect selling, general and administrative expense to
decline as a percentage of net sales and on a cost per watt
basis as our net sales and our total watts produced increase.
Production
start-up
Production
start-up
expense consists primarily of salaries and personnel-related
costs and the cost of operating a production line before it has
been qualified for full production, including the cost of raw
materials for solar modules run through the production line
during the qualification phase. It also includes all expenses
related to the selection of a new site and the related legal and
regulatory costs and the costs to maintain our plant replication
program, to the extent we cannot capitalize these expenditures.
We incurred production
start-up
expenses of $11.7 million during fiscal year 2006 in
connection with the qualification of the Ohio expansion and the
planning and preparation for operation of the German plant. We
incurred production
start-up
expenses of $16.9 million during 2007 in connection with
the qualification of the German plant and the planning and
preparation of our plants at our Malaysian manufacturing center.
We expect to incur significant production
start-up
expenses in fiscal year 2008 in connection with our plants at
the Malaysian manufacturing center. In general, we expect
production
start-up
expenses per production line to be higher when we build an
entirely new manufacturing facility compared to the addition of
new production lines at an existing manufacturing facility,
primarily due to the additional infrastructure investment
required when building an entirely new facility. Over time, we
expect production
start-up
expenses to decline as a percentage of net sales and on a cost
per watt basis as a result of economies of scale.
Interest
income
Interest income is earned on our cash, cash equivalents and
marketable securities.
34
Interest
expense
Interest expense is incurred on various debt financings. See
Description of Certain Indebtedness.
Foreign
currency gain (loss)
Foreign currency gain (loss) consists of gains and losses
resulting from holding assets and liabilities and conducting
transactions denominated in currencies other than our functional
currency, the U.S. dollar.
Income
Taxes
We were incorporated as a Delaware corporation on
February 22, 2006. As a Delaware corporation, we are
subject to federal and state income taxes. Prior to
February 22, 2006, we operated as a Delaware limited
liability company and were not subject to state or federal
income taxes. As a result, the annual historical financial data
included in this Annual Report on
Form 10-K
does not reflect what our financial position and results of
operations would have been, had we been a taxable corporation
for a full fiscal year.
At December 29, 2007 we had U.S. federal, state, and
non-U.S. net
operating loss carryforwards of approximately
$131.3 million, $55.3 million, and $5.3 million,
respectively. Our ability to use these net operating loss
carry-forwards is dependent on our ability to generate taxable
income in future periods and subject to certain international
tax laws.
Certain of our
non-U.S. subsidiaries
are subject to income taxes in their foreign jurisdictions. We
expect the tax consequences of our
non-U.S. subsidiaries
will become significant as we expand our
non-U.S. production
capacity.
We recognize deferred tax assets and liabilities for differences
between the financial statement and income tax bases of assets
and liabilities. We provide valuation allowances against
deferred tax assets when we cannot conclude that it is more
likely than not that some portion or all of the deferred tax
assets will be realized. As of December 29, 2007, we had
net deferred tax assets of $55.7 million, consisting
primarily of tax-basis goodwill, property, plant and equipment,
economic development funding and share-based compensation.
During the year ended December 29, 2007, we reversed
valuation allowances in the amount of $54.9 million. As of
December 30, 2006, we had net deferred tax assets of
$54.9 million before valuation allowances, consisting
primarily of tax-basis goodwill, property, plant and equipment,
economic development funding and share-based compensation.
Critical
Accounting Policies and Estimates
In preparing our financial statements in conformity with
generally accepted accounting principles in the United States
(GAAP), we make estimates and assumptions about future events
that affect the amounts of reported assets, liabilities,
revenues and expenses, as well as the disclosure of contingent
liabilities in our financial statements and the related notes
thereto. Some of our accounting policies require the application
of significant judgment by management in the selection of
appropriate assumptions for determining these estimates. By
their nature, these judgments are subject to an inherent degree
of uncertainty. As a result, we cannot assure you that actual
results will not differ significantly from estimated results. We
base our judgments and estimates on our historical experience,
on our forecasts and on other available information, as
appropriate. Our significant accounting policies are further
described in note 2 to our consolidated financial
statements for the fiscal year ended December 29, 2007
included elsewhere in this Annual Report on
Form 10-K.
Our critical accounting policies and estimates, which require
the most significant management estimates and judgment in
determining amounts reported in our consolidated financial
statements included elsewhere in this prospectus are as follows:
Revenue recognition. We sell our products
directly to system integrators and recognize revenue when
persuasive evidence of an arrangement exists, delivery of the
product has occurred and title and risk of loss has passed to
the customer, the sales price is fixed or determinable and
collectability of the resulting receivable is reasonably
assured. This policy is in accordance with the requirements of
SEC Staff Accounting Bulletin No. (SAB) 101, Revenue
Recognition in Financial Statements, as amended by
SAB 104, Revision of Topic 13 (Revenue Recognition).
Under this policy, we record a trade receivable for the selling
price of our product and reduce
35
inventory for the cost of goods sold when delivery occurs in
accordance with the terms of the respective sales contracts.
During 2006, we changed the terms of our sales contracts with
all of our significant customers to provide that delivery occurs
when we deliver our products to the carrier, rather than when
the products are received by our customer, as had been our terms
under our prior contracts. This change in the terms of our sales
contracts resulted in a one-time increase to our net sales of
$5.4 million during the year ended December 30, 2006.
We do not offer extended payment terms or rights of return for
our sold products.
With our acquisition of Turner Renewable Energy, LLC on
November 30, 2007, a portion of our revenues will be
derived from long-term contracts that we account for under the
provisions of the American Institute of Certified Public
Accountants Statement of Position No. (SOP)
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Accordingly, we will record
long-term fixed-price contracts on the percentage of completion
basis using the ratio of costs incurred to estimated total costs
at completion as the measurement basis for progress toward
completion and revenue recognition. If we identify any losses on
contracts, we will recognize those losses immediately. Contract
accounting requires significant judgment in assessing risks,
estimating contract costs and making related assumptions for
schedule and technical issues. Furthermore, contract change
orders, claims and similar items, require us to use judgment in
estimating related amounts and assessing the potential for
realization. We only include contract change orders, claims and
similar items in contract value when we can reliably estimate
their amounts and can conclude that their realization is
probable.
Incurred costs include all direct material, labor, subcontractor
cost, and those indirect costs related to contract performance,
such as indirect labor, supplies and tools. We include job
material costs when the job materials have been installed. Where
contracts specify that title to job materials transfers to the
customer before installation has been performed, we defer
revenue and recognize it upon installation, using the
percentage-of-completion method of accounting. We consider job
materials to be installed materials when they are permanently
attached or fitted to the solar power systems as required by the
engineering design.
As of December 29, 2007, our liability for billings
in excess of costs and estimated earnings, which is part
of the balance sheet caption accounts payable and accrued
liabilities, was $2.1 million. This liability
represents our billings in excess of revenues recognized on our
contracts, which results from differences between contractual
billing schedules and the timing of revenue recognition under
our revenue recognition accounting policies.
We also have a limited number of arrangements that include
multiple deliverables. These are contracts under which we both
provide design and consulting services for and supply parts and
equipment for solar electricity generation systems. We follow
the guidance in Emerging Issues Task Force Issue No. (EITF)
00-21,
Revenue Arrangements with Multiple Deliverables, when
accounting for these arrangements in order to determine whether
they have more than one unit of accounting. According to
EITF 00-21,
deliverable elements in a revenue arrangement with multiple
deliverables are separate units of accounting if the elements
have standalone value to the customer, if objective and reliable
evidence of the fair value of undelivered elements is available,
and if the arrangement does not include a general right of
return related to delivered items. We determined that our design
and supply arrangements generally consist of two elements that
qualify as separate units of accounting, the provision of design
and consulting services and the supply of solar electricity
generation system parts and equipment. We apply the same revenue
recognition principles (from SAB 104) as we use for
our arrangements for the stand-alone sales of products to the
recognition of revenue on the parts and equipment unit of
accounting of our multiple deliverable arrangements. We
recognize revenue from the design and consulting services unit
of accounting using the percentage of completion method in
accordance with
SOP 81-1.
End of life collection and recycling. At the
time of sale, we recognize an expense for the estimated fair
value of our future obligation for collecting and recycling the
solar modules that we have sold once they have reached the end
of their useful lives. We base our estimate of the fair value of
our collection and recycling obligations on the present value of
the expected future cost of collecting and recycling the solar
modules, which includes the cost of packaging the solar module
for transport, the cost of freight from the solar modules
installation site to a recycling center and the material, labor
and capital costs of the recycling process and an estimated
third-party profit margin and return on risk rate for such
services. We based this estimate on our experience collecting
and recycling our solar modules and on our expectations about
future developments in recycling technologies and processes and
about economic conditions at the time the solar modules will be
collected and recycled. In the periods between the time of
36
our sales and our settlement of the collection and recycling
obligations, we accrete the carrying amount of the associated
liability by applying the discount rate used in its initial
measurement. We charged $2.5 million and $8.9 million
to cost of sales for the fair value of our collection and
recycling obligation for solar modules sold during the fiscal
year ended December 30, 2006 and December 29, 2007,
respectively. During the year ended December 30, 2006 the
accretion expense on our collection and recycling obligations
was insignificant, and during the year ended December 29,
2007 the accretion expense was $0.3 million. An increase of
10% or a decrease of 10% in our estimate of the future cost of
collecting and recycling each solar module would result in a 10%
increase or decrease, respectively, in our annual collection and
recycling cost accrual; a 10% increase in the rate we use to
discount the future estimated cost would result in a 9% decrease
in our estimated costs; and a 10% decrease in the rate would
result in a 10% increase in the cost.
Product warranties. We provide a limited
warranty to the owner of our solar modules for five years
following delivery for defects in materials and workmanship
under normal use and service conditions. We also warrant to the
owner of our solar modules that solar modules installed in
accordance with
agreed-upon
specifications will produce at least 90% of their initial power
output rating within the first 10 years following their
installation and at least 80% of their initial power output
rating within the following 15 years. Our warranties are
automatically transferred from the original purchaser of our
solar modules to a subsequent purchaser. We accrue warranty
costs when we recognize sales, using amounts estimated based on
our historical experience with warranty claims, our monitoring
of field installation sites and in-house testing. During the
fiscal year ended December 31, 2005, we reduced our
estimate of our product warranty liability by $1.0 million
because lower manufacturing costs reduced our estimate of the
cost required to replace our solar modules under warranty.
During the fiscal years ended December 30, 2006 and
December 29, 2007, this estimate did not require further
significant adjustments.
Share-based compensation. In December 2004,
the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. (SFAS) 123(R),
Share-Based Payment, which requires companies to
recognize compensation expense for all share-based payments to
employees, including grants of employee stock options, in their
statements of operations based on the fair value of the awards,
and we adopted SFAS 123(R) during the first quarter of the
fiscal year ended December 31, 2005 using the
modified retrospective method of transition. In
March 2005, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. (SAB) 107, which provides
guidance regarding the implementation of SFAS 123(R). In
particular, SAB 107 provides guidance regarding calculating
assumptions used in share-based compensation valuation models,
the classification of share-based compensation expense, the
capitalization of share-based compensation costs and disclosures
in managements discussion and analysis in filings with the
SEC.
Determining the appropriate fair-value model and calculating the
fair value of share-based awards at the date of grant using the
valuation model requires judgment. We use the
Black-Scholes-Merton valuation formula to estimate the fair
value of employee stock options, which is consistent with the
provisions of SFAS No. 123(R). Option pricing models,
including the Black-Scholes-Merton formula, require the use of
input assumptions, including expected volatility, expected term,
expected dividend rate and expected risk-free rate of return.
Because our stock has only recently become publicly traded, we
do not have a meaningful observable share-price volatility;
therefore, we estimate our expected volatility based on that of
similar publicly-traded companies and expect to continue to do
so until such time as we might have adequate historical data
from our own traded share price. We estimated our options
expected terms using our best estimate of the period of time
from the grant date that we expect the options to remain
outstanding. If we determine another method to estimate expected
volatility or expected term is more reasonable than our current
methods, or if another method for calculating these input
assumptions is prescribed by authoritative guidance, the fair
value calculated for future share-based awards could change
significantly from those used for past awards, even if the
critical terms of the awards are similar. Higher volatility and
expected terms result in an increase to share-based compensation
determined at the date of grant. The expected dividend rate and
expected risk-free rate of return are not as significant to the
calculation of fair value.
In addition, SFAS No. 123(R) requires us to develop an
estimate of the number of share-based awards which we expect to
vest. Quarterly changes in our estimates of award forfeiture
rates can have a significant effect on reported share-based
compensation. Increases to the estimated forfeiture rate will
result in a decrease to the expense recognized in the financial
statements during the quarter of the change and future quarters.
Decreases in the estimated forfeiture rate will result in an
increase to the expense recognized in the financial statements
during the
37
quarter of the change and future quarters. These adjustments
affect our cost of sales, research and development expenses,
selling, general and administrative and production
start-up
expenses. The adjustments to our estimates of the number of
share-based awards that we expect to vest reduced our
share-based compensation expense by $0.6 million in the
fiscal year ended December 30, 2006 and increased our
share-based compensation expense by $2.9 million in the
fiscal year ended December 29, 2007. Adjustments to our
estimates of the number of share-based awards that we expect to
vest did not have a significant impact on our financial
statements for any prior year. The expense we recognize in
future periods could differ significantly from the current
period
and/or our
forecasts due to adjustments in the estimated number of
share-based awards that we expect to vest.
Valuation of Long-Lived Assets. Our long-lived
assets include manufacturing equipment and facilities. Our
business requires significant investment in manufacturing
facilities that are technologically advanced but that may become
obsolete through changes in our industry or the fluctuations in
demand for our solar modules. We account for our long-lived
tangible assets and definite-lived intangible assets in
accordance with SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. 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 the long-lived assets
may not be recoverable. These events would include significant
current period operating or cash flow losses combined with a
history of such losses, significant changes in the manner of use
of assets and significant negative industry or economic trends.
We evaluated our long-lived assets for impairment during 2007
and did not note any triggering events that the carrying values
of material long-lived assets are not recoverable.
Accounting for Income Taxes. We account for
income taxes using the asset and liability method, in accordance
with SFAS 109, Accounting for Income Taxes. We
operate in multiple taxing jurisdictions under several legal
forms. As a result, we are subject to the jurisdiction of a
number of U.S. and
non-U.S. tax
authorities and to tax agreements and treaties among these
governments. Our operations in these different jurisdictions are
taxed on various bases, including income before taxes calculated
in accordance with jurisdictional regulations. Determining our
taxable income in any jurisdiction requires the interpretation
of the relevant tax laws and regulations and the use of
estimates and assumptions about significant future events,
including the following: the amount, timing and character of
deductions; permissible revenue recognition methods under the
tax law; and the sources and character of income and tax
credits. Changes in tax laws, regulations, agreements and
treaties, currency exchange restrictions, or our level of
operations or profitability in each taxing jurisdiction could
have an impact on the amount of income tax assets, liabilities,
expenses and benefits that we record during any given period.
The ultimate realization of deferred tax assets depends on the
generation of sufficient taxable income of the appropriate
character and in the appropriate taxing jurisdictions during the
future periods in which the related temporary differences become
deductible. We determine the valuation allowance on our deferred
tax assets in accordance with the provisions of SFAS 109,
which require us to weigh both positive and negative evidence in
order to ascertain whether it is more likely than not that
deferred tax assets will be realized. We evaluate all
significant available positive and negative evidence, including
the existence of cumulative net losses, benefits that could be
realized from available tax strategies and forecasts of future
taxable income, in determining the need for a valuation
allowance on our deferred tax assets.
Certain Effects of the acquisition of Turner Renewable
Energy, LLC. The Turner Renewable Energy, LLC
(TRE) acquisition is being accounted for under the
purchase method of accounting, in accordance with FASB Statement
No. 141, Business Combinations. Under the purchase
method of accounting, TREs results of operations and the
impact of the completion of the acquisition will be reflected in
our financial statements on a prospective basis.
Fiscal December 2007 financial results for First Solar Electric,
LLC (formerly Turner Renewable Energy, LLC) were immaterial
to our consolidated results of operations.
Goodwill. Goodwill represents the excess of
the purchase price of acquired companies over the estimated fair
value assigned to the individual assets acquired and liabilities
assumed. We do not amortize goodwill, but instead test goodwill
for impairment at least annually and, if necessary, would record
any impairment in accordance with FAS 142, Goodwill
and Other Intangible Assets. We will perform the first
annual impairment review in the fourth quarter of fiscal 2008 or
earlier if facts and circumstances warrant a review. In the
process of our annual
38
impairment review, we primarily use the income approach
methodology of valuation that includes the discounted cash flow
method as well as other generally accepted valuation
methodologies to determine the fair value of our goodwill.
Significant management judgment is required in the forecasts of
future operating results that are used in the discounted cash
flow method of valuation.
Marketable Securities. We have classified our
marketable securities as available-for-sale. Such
marketable securities are recorded at fair value and unrealized
gains and losses are recorded to accumulated other comprehensive
income (loss) until realized. Realized gains and losses on sales
of all such securities are reported in earnings, computed using
the specific identification cost method. All of our
available-for-sale marketable securities are subject to a
periodic impairment review. We consider our marketable debt
securities impaired, when a significant decline in the
issuers credit quality is likely to have a significant
adverse effect on the fair value of the investment. Investments
identified as being impaired are subject to further review to
determine if the investment is other than temporarily impaired,
in which case the investment is written down to its impaired
value and a new cost basis is established.
Results
of Operations
The following table sets forth our consolidated statements of
operations for the periods indicated as a percentage of net
sales for the years ended December 29, 2007,
December 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
50.1
|
%
|
|
|
59.8
|
%
|
|
|
65.5
|
%
|
Gross profit
|
|
|
49.9
|
%
|
|
|
40.2
|
%
|
|
|
34.5
|
%
|
Research and development
|
|
|
3.0
|
%
|
|
|
4.7
|
%
|
|
|
5.0
|
%
|
Selling, general and administrative
|
|
|
16.4
|
%
|
|
|
24.7
|
%
|
|
|
32.9
|
%
|
Production
start-up
|
|
|
3.3
|
%
|
|
|
8.7
|
%
|
|
|
6.6
|
%
|
Operating income (loss)
|
|
|
27.2
|
%
|
|
|
2.1
|
%
|
|
|
(10.0
|
)%
|
Foreign currency gain (loss)
|
|
|
0.4
|
%
|
|
|
4.1
|
%
|
|
|
(3.6
|
)%
|
Interest income
|
|
|
4.1
|
%
|
|
|
2.0
|
%
|
|
|
0.7
|
%
|
Interest expense, net
|
|
|
(0.5
|
)%
|
|
|
(0.8
|
)%
|
|
|
(0.9
|
)%
|
Other (expense) income
|
|
|
(0.3
|
)%
|
|
|
(0.6
|
)%
|
|
|
0.2
|
%
|
Income tax benefit (expense)
|
|
|
0.5
|
%
|
|
|
(3.9
|
)%
|
|
|
|
|
Cumulative effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
0.2
|
%
|
Net income (loss)
|
|
|
31.4
|
%
|
|
|
2.9
|
%
|
|
|
(13.4
|
)%
|
Fiscal
Years Ended December 29, 2007 and December 30,
2006
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Net sales
|
|
$
|
503,976
|
|
|
$
|
134,974
|
|
|
$
|
369,002
|
|
|
|
273
|
%
|
The increase in our net sales was due primarily to a 259%
increase in the MW volume of solar modules sold in 2007 compared
to 2006. We were able to increase the MW volume of solar modules
sold primarily as a result of the production ramp at our German
plant, the full production of our Ohio expansion and continued
improvements to our overall process. In addition, we increased
the average number of sellable watts per solar module by
approximately 11% in 2007 compared with 2006. Our average
selling price in 2007 increased to $2.48 from $2.39 in 2006. Our
average selling price was positively impacted by $0.21 due to a
favorable foreign exchange rate between the U.S. dollar and
the euro and partially offset by a price decline of $0.12.
Approximately 91% of our net sales in 2007 resulted from sales
of solar modules to customers headquartered in Germany.
39
Cost of
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Cost of sales
|
|
$
|
252,573
|
|
|
$
|
80,730
|
|
|
$
|
171,843
|
|
|
|
213
|
%
|
% of net sales
|
|
|
50.1
|
%
|
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
Direct material expense increased by $87.3 million,
warranty and end of life costs relating to the collection and
recycling of our solar modules increased by $9.1 million,
sales freight and other costs increased by $3.2 million, in
each case, primarily as a result of higher production volumes in
2007 compared with 2006. In addition, manufacturing overhead
costs increased by $72.2 million, which was primarily
composed of an increase in salaries and personnel related
expenses of $43.0 million, including an increase in
share-based compensation expense from $4.2 million in 2006
to $9.5 million in 2007, resulting from the infrastructure
associated with our Ohio expansion and German plant build-out,
facility and related expenses of $16.0 million and
depreciation expense of $13.2 million, primarily as a
result of additional equipment becoming operational at our Ohio
and German plants.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Gross profit
|
|
$
|
251,403
|
|
|
$
|
54,244
|
|
|
$
|
197,159
|
|
|
|
363
|
%
|
Gross margin%
|
|
|
49.9
|
%
|
|
|
40.2
|
%
|
|
|
|
|
|
|
|
|
Gross profit increased by $197.2 million, or 363%, from
$54.2 million in 2006 to $251.4 million in 2007,
reflecting an increase in net sales. As a percentage of sales,
gross margin increased 9.7 percentage points from 40.2% in
2006 to 49.9% 2007, representing increased leverage of our fixed
cost infrastructure and scalability associated with our plant
expansions, which drove a 259% increase in the number of
megawatts sold. Additionally, we incurred $7.6 million of
costs, or 1.5% of revenues, associated with the ramp of our
German plant in 2007, compared with $1.1 million of costs,
or 0.8% of revenues, incurred in 2006 related to the ramp of our
Ohio expansion. For fiscal 2007 foreign exchange gains
contributed approximately 3 percentage points to our gross
margin, offsetting the majority of our annual contractual price
decline.
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Research and development
|
|
$
|
15,107
|
|
|
$
|
6,361
|
|
|
$
|
8,746
|
|
|
|
137
|
%
|
% of net sales
|
|
|
3.0
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development expense was primarily
the result of a $7.9 million increase in personnel related
expense, including an increase in share-based compensation
expense from $2.3 million in 2006 to $4.7 million in
2007, due to increased headcount and additional share-based
compensation awards. Consulting and other expenses also
increased by $1.7 million and grant revenue increased by
$0.9 million in 2007 compared to 2006.
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Selling, general and administrative
|
|
$
|
82,248
|
|
|
$
|
33,348
|
|
|
$
|
48,900
|
|
|
|
147
|
%
|
% of net sales
|
|
|
16.4
|
%
|
|
|
24.7
|
%
|
|
|
|
|
|
|
|
|
40
Selling, general and administrative expense increased primarily
as a result of an increase in salaries and personnel-related
expenses of $36.1 million, due to increased headcount and
an increase in share-based compensation from $5.3 million
in 2006 to $23.4 million in 2007. In addition, legal and
professional service fees increased by $11.3 million and
other expenses increased by $1.5 million during 2007,
primarily resulting from costs incurred in connection with being
a public company and infrastructure build out to support our
growth.
Production
start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Production
start-up
|
|
$
|
16,867
|
|
|
$
|
11,725
|
|
|
$
|
5,142
|
|
|
|
44
|
%
|
% of net sales
|
|
|
3.3
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
In 2007, we incurred $16.9 million of production
start-up
expenses related to our German and Malaysia expansions,
including legal, regulatory and personnel costs, compared with
$11.7 million of production
start-up
expenses for our Ohio and German plant expansions during 2006.
Production
start-up
expenses are primarily attributable to the cost of labor and
material and depreciation expense to run and qualify the line,
related facility expenses, management of our replication process
and legal and regulatory costs.
Foreign
exchange gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Foreign exchange gain
|
|
$
|
1,881
|
|
|
$
|
5,544
|
|
|
$
|
(3,663
|
)
|
|
|
N.M.
|
|
Foreign exchange gain decreased by $3.7 million from 2006
to 2007 primarily as a result of hedging the foreign exchange
exposure in 2007 to mitigate some of the impact on the
fluctuating dollar.
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
20,413
|
|
|
$
|
2,648
|
|
|
$
|
17,765
|
|
|
|
N.M.
|
|
The increase in interest income of $17.8 million was
primarily due to increased interest income resulting from higher
cash, cash equivalent and marketable securities balances
throughout 2007. We completed an initial public offering in the
fourth quarter of 2006 which resulted in net proceeds of
$302.7 million and an equity follow-on public offering in
the third quarter of 2007, which provided us with net proceeds
of $366.0 million. We also had higher investments in 2007
compared to 2006 that generated interest at higher rates.
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Interest expense, net
|
|
$
|
2,294
|
|
|
$
|
1,023
|
|
|
$
|
1,271
|
|
|
|
124
|
%
|
Interest expense, net of amounts capitalized, increased by
$1.3 million or 124%, from 2006 to 2007 primarily as a
result of increased borrowings associated with our German plant
financing. In 2007, we capitalized $3.8 million of interest
expense to construction in progress compared to
$3.3 million in 2006.
41
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Other expense
|
|
$
|
1,219
|
|
|
$
|
799
|
|
|
$
|
420
|
|
|
|
N.M.
|
|
The increase in other expense of $0.4 million was primarily
due to increased financing fees related to the IKB loans.
Income
tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2007
|
|
2006
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Income tax benefit (expense)
|
|
$
|
2,392
|
|
|
$
|
(5,206
|
)
|
|
$
|
7,598
|
|
|
|
N.M.
|
|
Our 2007 annual income tax benefit was $2.4 million. The
2007 tax rate was a benefit of 1.5% which primarily reflects the
net of a tax rate of 33.7% and a rate benefit of 35.2% due to
the reversal of a valuation allowance on our deferred tax assets
of $54.9 million. The reversal was based upon our updated
assessment of the future realization of our deferred income tax
assets. The available positive evidence during fiscal 2007
included cumulative taxable income for the previous twelve
quarters and a projection of future taxable income. The income
tax expense for 2006 was the result of a change in corporate
form from a limited liability company to a corporation,
profitability in 2006 and a full valuation allowance against our
deferred tax assets.
Fiscal
Years Ended December 30, 2006 and December 31,
2005
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Net sales
|
|
$
|
134,974
|
|
|
$
|
48,063
|
|
|
$
|
86,911
|
|
|
|
181
|
%
|
Net sales increased by $86.9 million, or 181%, from
$48.1 million in 2005 to $135.0 million in 2006. The
increase in our net sales was due primarily to a 184% increase
in the MW volume of solar modules sold in 2006 compared to 2005.
We were able to increase the MW volume of solar modules sold
primarily as a result of higher throughput, our conversion from
a five day to a seven day production week and the full
production ramp of our Ohio expansion. Net sales in 2006 also
benefited from a change in our shipping terms from delivered
duty paid to carriage and insurance paid, which became effective
in the second quarter of 2006. This change affected revenue
recognition by $5.4 million of in-transit inventory during
the first half of 2006. In addition, we increased the average
number of sellable watts per solar module from approximately 59
watts in 2005 to approximately 63 watts in 2006. The increase in
net sales was partially offset by a decrease in the average
selling price per watt from $2.43 in 2005 to $2.39 in 2006. Our
average selling price was positively impacted by $0.05 due to a
favorable foreign exchange rate between the U.S. dollar and
euro. Strong demand from other customers allowed us to reduce
our dependence on our largest customer from 45% of net sales in
2005 to 19% of net sales in 2006. In both periods, almost all of
our net sales resulted from sales of solar modules to customers
headquartered in Germany.
Cost of
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Cost of sales
|
|
$
|
80,730
|
|
|
$
|
31,483
|
|
|
$
|
49,247
|
|
|
|
156
|
%
|
% of net sales
|
|
|
59.8
|
%
|
|
|
65.5
|
%
|
|
|
|
|
|
|
|
|
Cost of sales increased by $49.2 million, or 156%, from
$31.5 million in 2005 to $80.7 million in 2006. Direct
material expense increased $21.6 million, warranty and end
of life costs relating to the collection and recycling of our
solar modules increased $3.7 million, direct labor expense
increased $3.9 million and sales freight and other
42
costs increased $1.2 million, in each case, primarily as a
result of higher production volumes during 2006 compared to
2005. In addition, manufacturing overhead costs increased by
$18.9 million, which was primarily composed of an increase
in salaries and personnel related expenses of $8.7 million,
including a $3.3 million increase in share-based
compensation expense, resulting from the conversion from a five
day to a seven day production week and the overall
infrastructure build-out of our Ohio expansion, an increase in
facility related expenses of $4.3 million and an increase
in depreciation expense of $5.9 million, primarily as a
result of additional equipment becoming operational at our Ohio
expansion.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Gross profit
|
|
$
|
54,244
|
|
|
$
|
16,580
|
|
|
$
|
37,664
|
|
|
|
227
|
%
|
Gross margin%
|
|
|
40.2
|
%
|
|
|
34.5
|
%
|
|
|
|
|
|
|
|
|
Gross profit increased by $37.7 million, or 227%, from
$16.6 million in 2005 to $54.2 million in 2006,
reflecting an increase in net sales. As a percentage of sales,
gross margin increased from 34.5% in 2005 to 40.2% in 2006,
representing increased leverage of our fixed cost infrastructure
and scalability associated with the expansion of our Ohio plant,
which drove a 184% increase in the number of MW sold.
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Research and development
|
|
$
|
6,361
|
|
|
$
|
2,372
|
|
|
$
|
3,989
|
|
|
|
168
|
%
|
% of net sales
|
|
|
4.7
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Research and development expense increased by $4.0 million, or
168%, from $2.4 million in 2005 to $6.4 million in 2006. The
increase in research and development expense was primarily the
result of a $3.2 million increase in personnel related expense,
including an increase in share-based compensation expense from
$0.6 million in 2005 to $2.3 million in 2006, due to increased
headcount and additional option awards. Consulting and other
expenses also increased by $0.7 million and grant revenue
declined by $0.1 million in 2006
compared to 2005
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Selling, general and administrative
|
|
$
|
33,348
|
|
|
$
|
15,825
|
|
|
$
|
17,523
|
|
|
|
111
|
%
|
% of net sales
|
|
|
24.7
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by
$17.5 million, or 111%, from $15.8 million in 2005 to
$33.3 million in 2006. Selling, general and administrative
expense increased primarily as a result of an increase in
salaries and personnel-related expenses of $12.0 million,
due to increased headcount and an increase in share-based
compensation from $3.4 million in 2005 to $5.3 million
in 2006. In addition, legal and professional service fees
increased by $4.8 million and other expenses increased by
$0.7 million during 2006, primarily resulting from costs
incurred in connection with being a public company.
43
Production
start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Production
start-up
|
|
$
|
11,725
|
|
|
$
|
3,173
|
|
|
$
|
8,552
|
|
|
|
270
|
%
|
% of net sales
|
|
|
8.7
|
%
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
In 2006, we incurred $11.7 million of production
start-up
expenses to qualify our Ohio expansion and ramp our German
plant, including related legal and regulatory costs and
increased headcount, compared to $3.2 million of production
start-up
expenses for our Ohio expansion during 2005. Production
start-up
expenses are primarily attributable to the cost of labor and
material to run and qualify the line, related facility expenses
and management of our replication process.
Foreign
exchange gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Foreign exchange gain (loss)
|
|
$
|
5,544
|
|
|
$
|
(1,715
|
)
|
|
$
|
7,259
|
|
|
|
N.M.
|
|
Foreign exchange gain increased by $7.3 million from 2005
to 2006 primarily as a result of favorable currency translation
between the U.S. dollar and the euro.
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
2,648
|
|
|
$
|
316
|
|
|
$
|
2,332
|
|
|
|
N.M.
|
|
The increase in interest income of $2.3 million was
primarily due to higher cash balances as a result of our initial
public offering in the fourth quarter of 2006, which resulted in
net proceeds of approximately $302.7 million.
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Interest expense, net
|
|
$
|
1,023
|
|
|
$
|
418
|
|
|
$
|
605
|
|
|
|
N.M.
|
|
Interest expense, net of amounts capitalized, increased by
$0.6 million from 2005 to 2006 primarily as a result of
increased borrowings associated with our German plant financing.
In 2006, we capitalized $3.3 million of interest expense to
construction in progress compared to $0.4 million in 2005.
Other
(expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Other (expense) income
|
|
$
|
(799
|
)
|
|
$
|
56
|
|
|
$
|
(855
|
)
|
|
|
N.M.
|
|
The increase in other expense of $0.9 million was primarily
due to increased financing fees.
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Income tax expense
|
|
$
|
5,206
|
|
|
$
|
|
|
|
$
|
5,206
|
|
|
|
N.M.
|
|
44
The increase in income tax expense was the result of a change in
corporate form from a limited liability company to a
corporation, profitability in 2006, and a full valuation
allowance against our deferred tax assets.
Cumulative
effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
Year Over
|
|
|
2006
|
|
2005
|
|
Year Change
|
|
|
(Dollars in thousands)
|
|
Cumulative effect
|
|
$
|
|
|
|
$
|
89
|
|
|
$
|
(89
|
)
|
|
|
N.M.
|
|
The adoption of SFAS 123(R) required a change in the method
used to estimate forfeitures of employee stock options resulting
in a one-time cumulative effect of $0.1 million in the
first quarter of 2005.
Liquidity
and Capital Resources
Historically, our principal sources of liquidity have been cash
provided by operations, borrowings from JWMA Partners, LLC
(JWMA) and its affiliates, borrowings from Goldman,
Sachs & Co., equity contributions from JWMA and
borrowings from local governments, capital markets and other
sources to fund plant expansions. During the fiscal year ended
December 30, 2006, we received $302.7 million in net
proceeds from an initial public offering of our common stock.
During the fiscal year ended December 29, 2007, we received
$366.0 million in net proceeds from a follow-on offering of
our common stock. As of December 29, 2007, we had
$669.7 million in cash, cash equivalents and marketable
securities, compared to $308.4 million as of
December 30, 2006. One of our strategies is to expand our
manufacturing capacity by building new manufacturing plants and
production lines, such as the recently completed German plant
and the plants currently under construction at our Malaysia
manufacturing center. We expect that each four line
manufacturing plant that we are building in Malaysia will
require a capital expenditure of approximately
$170.0 million to complete. We believe that our current
cash, cash equivalents, marketable securities, cash flows from
operating activities, government grants and low interest debt
financings for our German plant will be sufficient to meet our
working capital and capital expenditures needs for at least the
next 12 months. However, if our financial results or
operating plans change from our current assumptions, we may not
have sufficient resources to support our expansion strategy. We
may engage in one or more debt or equity financings in the
future, which could result in increased expenses or dilution to
our existing stockholders. If we are unable to obtain debt or
equity financing on reasonable terms, we may be unable to
execute our expansion strategy. See Item 1A: Risk
Factors Our future success depends on our ability to
build new manufacturing plants and add production lines in a
cost-effective manner, both of which are subject risks and
uncertainties.
We spent $70.1 million in capital expenditures for the Ohio
expansion through 2006. In addition, we spent approximately
$150.0 million for the build-out of our German plant
through 2007. We expect to spend approximately
$170.0 million to build each of the four plants at our
Malaysian manufacturing center. We spent $229.0 million
toward the build-out of each of these plants at our Malaysian
manufacturing center in 2007 and we expect to spend
approximately $377.0 million in 2008 and an additional
$74.0 million in 2009. A majority of our capital
expenditures for 2008 and 2009 will be incurred in foreign
currency and therefore are subject to fluctuations in currency
exchange rates.
Cash
Flows
Cash provided (used) was as follows for the twelve months ended
December 29, 2007, December 30, 2006 and
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities
|
|
$
|
205,951
|
|
|
$
|
(576
|
)
|
|
$
|
5,040
|
|
Investing activities
|
|
|
(547,250
|
)
|
|
|
(159,994
|
)
|
|
|
(43,832
|
)
|
Financing activities
|
|
|
430,421
|
|
|
|
451,550
|
|
|
|
51,663
|
|
Effect of exchange rates on cash flows
|
|
|
7,050
|
|
|
|
391
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
96,172
|
|
|
$
|
291,371
|
|
|
$
|
13,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Operating
activities
Cash provided by operating activities was $206.0 million
during 2007 compared to cash used in operating activities of
$0.6 million during 2006. Cash provided by interest
receivable increased to $20.0 million during 2007 from
$2.6 million during 2006 mainly due to the increased cash
from the initial public offering and the follow-on offering.
Cash received from customers increased to $516.0 million
during 2007 from $110.2 million during 2006 mainly due to
an increase in net sales and shorter payment terms. This
increase was partially offset by an increase in cash paid to
suppliers and associates of $276.5 million compared to cash
paid to suppliers and employees of $111.9 million during
2006, mainly due to an increase in raw materials, an increase in
personnel related costs due to higher headcount and other costs
supporting our global expansion and by an increase in cash paid
for income taxes of $19.0 million during 2007.
Cash used in operating activities was $0.6 million during
2006 compared to cash provided by operating activities of
$5.0 million during 2005. During 2006, cash received from
customers increased by $60.6 million to
$110.2 million, mainly due to increased accounts receivable
resulting from higher revenues. This increase was offset by cash
paid to suppliers and associates of $111.9 million during
2006, mainly due to an increase in inventories to support
revenue growth and other costs supporting our global expansion.
Investing
activities
Cash used in investing activities was $547.3 million during
2007 compared with $160.0 million during 2006. Cash used in
investing activities resulted primarily from capital
expenditures of $242.4 million during 2007 and
$153.2 million during 2006 and the net purchase of
marketable securities of $293.4 million during 2007. The
increase in capital expenditures was primarily due to our
investments related to the construction of our new plants in
Germany and Malaysia. Our cash outlays for the German plant were
partially recovered through the receipt of $9.5 million and
$16.8 million in 2007 and 2006, respectively, of economic
development funding from various German governmental entities,
which we classify as a cash flow from financing activities. Cash
paid for the acquisition of Turner Renewable Energy, LLC, net of
cash acquired was $5.5 million.
Cash used in investing activities was $160.0 million during
2006 compared to $43.8 million during 2005. Cash used for
investing activities during 2006 was composed of
$153.2 million in capital expenditures for our German plant
and the Ohio expansion and $6.8 million in cash placed in
restricted accounts to fund our solar module collection and
recycling program, to secure our construction loan for the
German plant and to secure an inventory supply contract. Our
cash outlays for the German plant were partially recovered
through the receipt of $16.8 million of economic
development funding from various German governmental entities,
which we classify as a cash flow from financing activities. Cash
used in investing activities during 2005 was mainly composed of
$42.5 million in capital expenditures for our Ohio
expansion and $1.3 million placed in restricted accounts to
fund our solar module collection and recycling program.
Financing
activities
Cash provided by financing activities was $430.4 million
during 2007 compared with $451.6 million during 2006.
During 2007 we received $366.0 million in net proceeds
primarily from the issuance of our common stock as a result of
our follow-on offering and $49.4 million from additional
draws under debt facilities. Net proceeds from the exercise of
stock options were $10.2 million. Tax benefits related to
the exercise of stock options during 2007 were
$30.2 million. In addition, we received $9.5 million
in economic development funding from various German governmental
entities related to the construction of our plant in
Frankfurt/Oder, Germany. These receipts were partially offset by
$34.8 million in net repayments of long-term debt. During
2006, we received $302.7 million in net proceeds from an
initial public offering of our common stock, $130.8 million
in net proceeds from debt issued to third parties,
$36.0 million in loans from related parties, equity
contributions by JWMA of $30.0 million and receipt of
$16.8 million of economic development funding from various
German governmental entities. Partially offsetting these cash
receipts was the repayment of $64.7 million of loans from
related parties. On February 22, 2006, we issued
$74.0 million aggregate principal amount of convertible
senior subordinated notes due 2011 to Goldman, Sachs &
Co. On May 10, 2006, we extinguished these notes by payment
of 4,261,457 shares of our common stock.
46
On November 30, 2007, we completed the acquisition of
Turner Renewable Energy, LLC a privately held company which
designed and deployed commercial solar projects for utilities in
the United States. Starting in December 2007, we operated this
wholly owned subsidiary under the name of First Solar Electric,
LLC. The total consideration for the transaction was
$34.3 million (excluding exit and transaction costs of
$0.7 million), consisting of $28.0 million in common
stock and $6.3 million in cash (see note 5).
Cash provided by financing activities was $451.6 million
during 2006 compared to $51.7 million during 2005. During
2006, we received $302.7 million in net proceeds from an
initial public offering of our common stock, $130.8 million
in net proceeds from debt issued to third parties,
$36.0 million in loans from related parties, equity
contributions by JWMA of $30.0 million and receipt of
$16.8 million of economic development funding from various
German governmental entities. Partially offsetting these cash
receipts was the repayment of $64.7 million of loans from
related parties. On February 22, 2006, we issued
$74.0 million aggregate principal amount of convertible
senior subordinated notes due 2011 to Goldman, Sachs &
Co. On May 10, 2006, we extinguished these notes by payment
of 4,261,457 shares of our common stock. During 2005, cash
provided by financing activities was primarily the result of a
$20.0 million loan from a related party, a
$15.0 million loan from the Director of Development of the
State of Ohio and a $16.7 million cash equity contribution
by JWMA.
On October 24, 2006, we amended our articles of
incorporation to authorize us to issue up to
500,000,000 shares of common stock at a par value of $0.001
and up to 30,000,000 shares of preferred stock at a par
value of $0.001. These amended and restated articles of
incorporation permit our board of directors to establish the
voting powers, preferences, and other rights of any series of
preferred stock that we issue. On October 30, 2006, our
board of directors approved a 4.85 to 1 stock split of our
issued and outstanding common shares, which was effective
November 1, 2006; the par value of our common shares
remained $0.001 per share, and the number of authorized shares
of common and preferred stock remained the same. All share and
per share amounts presented in this Annual Report on
Form 10-K
and the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
Contractual
Obligations
The following table presents our contractual obligations as of
December 29, 2007, which consists of legal commitments
requiring us to make fixed or determinable cash payments,
regardless of contractual requirements with the vendor to
provide future goods or services. We purchase raw materials for
inventory, services and manufacturing equipment from a variety
of vendors. During the normal course of business, in order to
manage manufacturing lead times and help assure adequate supply,
we enter into agreements with suppliers that either allow us to
procure goods and services when we choose or that establish
purchase requirements.
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|
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|
|
|
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|
|
|
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Payments Due by Year
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Less Than
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|
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1 - 3
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|
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3 - 5
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More Than
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Contractual Obligations
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Total
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|
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1 Year
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|
|
Years
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|
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Years
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|
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5 Years
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|
|
(In thousands)
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|
Short-term debt obligations(1)
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$
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24,620
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|
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$
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24,620
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|
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$
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|
|
|
$
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|
|
|
$
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|
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Long-term debt obligations(1)
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|
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96,645
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|
|
|
19,578
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|
|
|
42,241
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|
|
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30,171
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|
|
|
4,655
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Capital lease obligations
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|
|
9
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|
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4
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5
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|
|
|
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Operating lease obligations
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21,387
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|
|
7,099
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|
|
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7,657
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|
|
|
3,396
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|
|
3,235
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Purchase obligations(2)
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430,505
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|
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125,460
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|
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161,107
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143,938
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|
|
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Recycling obligations
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|
13,079
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,079
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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586,245
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$
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176,761
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|
|
$
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211,010
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|
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$
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177,505
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$
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20,969
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|
|
|
|
|
|
|
|
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|
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(1) |
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Includes estimated cash interest to be paid over the remaining
terms of the debt. |
|
(2) |
|
Purchase obligations are agreements to purchase goods or
services that are enforceable and legally binding on us and that
specify all significant terms, including fixed or minimum
quantities to be purchased, fixed minimum, or variable price
provisions and the approximate timing of transactions. |
47
In addition to the amounts shown in the table above, we have
recorded $2.5 million of unrecognized tax benefits as
liabilities in accordance with FIN 48, and we are uncertain
as to if or when such amounts may be settled.
Debt
and Credit Sources
On July 27, 2006, First Solar Manufacturing GmbH, a wholly
owned indirect subsidiary of First Solar, Inc., entered into a
credit facility agreement with a consortium of banks led by IKB
Deutsche Industriebank AG under which we can draw up to
102.0 million ($149.9 million at the balance
sheet close rate on December 29, 2007 of $1.47/1.00)
to fund costs of constructing and starting up our German plant.
This credit facility consists of a term loan of up to
53.0 million ($77.9 million at the balance sheet
close rate on December 29, 2007 of $1.47/1.00) and a
revolving credit facility of 27.0 million
($39.7 million at the balance sheet close rate on
December 29, 2007 of $1.47/1.00). The facility also
provides for a bridge loan, which we can draw against to fund
construction costs that we later expect to be reimbursed through
funding from the Federal Republic of Germany under the
Investment Grant Act of 2005
(Investitionszulagen), of up to
22.0 million ($32.3 million at the balance sheet
close rate on December 29, 2007 of $1.47/1.00). We
can make drawdowns against the term loan and the bridge loan
until December 30, 2007 and we can make drawdowns against
the revolving credit facility until September 30, 2012. We
have incurred costs related to the credit facility totaling
$2.2 million as of December 29, 2007, which we will
recognize as interest and other financing expenses over the time
that borrowings are outstanding under the credit facility. We
also pay an annual commitment fee of 0.6% of any amounts not
drawn down on the credit facility. At December 29, 2007, we
had outstanding borrowings of $67.8 million under the term
loan, which we classify as long-term debt, and
$24.5 million under the bridge loan, which we classify as
short-term debt. We had no outstanding borrowings under the
revolving credit facility at December 29, 2007.
We must repay the term loan in eighteen quarterly payments
beginning on March 31, 2008 and ending on June 29,
2012. We must repay the bridge loan with any funding we receive
from the Federal Republic of Germany under the Investment Grant
Act of 2005, but in any event, the bridge loan must be paid in
full by December 30, 2008. Once repaid, we may not draw
against the term loan or bridge loan facilities. The revolving
credit facility expires on and must be completely repaid by
December 30, 2012. In certain circumstances, we must also
use proceeds from fixed asset sales or insurance claims to make
additional principal payments, and during 2009, we will also be
required to make a one-time principal repayment equal to 20% of
any surplus cash flow of First Solar Manufacturing
GmbH during 2008. Surplus cash flow is a term defined in the
credit facility agreement that is approximately equal to cash
flow from operating activities less required payments on
indebtedness.
We pay interest at the annual rate of the Euro interbank offered
rate (Euribor) plus 1.6% on the term loan, Euribor plus 2.0% on
the bridge loan and Euribor plus 1.8% on the revolving credit
facility. Each time we make a draw against the term loan or the
bridge loan, we may choose to pay interest on that drawdown
every three or six months; each time we make a draw against the
revolving credit facility, we may choose to pay interest on that
drawdown every one, three or six months. The credit facility
requires us to mitigate our interest rate risk on the term loan
by entering into pay-fixed, receive-floating interest rate swaps
covering at least 75% of the balance outstanding under the term
loan.
The Federal Republic of Germany is guaranteeing 48% of our
combined borrowings on the term loan and revolving credit
facility and the State of Brandenburg is guaranteeing another
32%. We pay an annual fee, not to exceed 0.5 million
($0.7 million at the balance sheet close rate on
December 29, 2007 of $1.47/1.00) for these
guarantees. In addition, we must maintain a debt service reserve
of 3.0 million ($4.4 million at the balance
sheet close rate on December 29, 2007 of $1.47/1.00)
in a restricted bank account, which the lenders may access if we
are unable to make required payments on the credit facility.
Substantially all of our assets in Germany, including the German
plant, have been pledged as collateral for the credit facility
and the government guarantees.
The credit facility contains various financial covenants with
which we must comply. First Solar Manufacturing GmbHs cash
flow available for debt service must be at least 1.1 times its
required principal and interest payments for all its liabilities
and the ratio of its total noncurrent liabilities to earnings
before interest, taxes, depreciation and amortization may not
exceed 3.0:1 from January 1, 2008 through December 31,
2008, 2.5:1 from January 1, 2009 through December 31,
2009 and 1.5:1 from January 1, 2010 through the remaining
term of the credit facility.
48
The credit facility also contains various non-financial
covenants with which we must comply. We must submit various
financial reports, financial calculations and statistics,
operating statistics and financial and business forecasts to the
lender. We must adequately insure our German operation and we
may not change the type or scope of its business operations.
First Solar Manufacturing GmbH must maintain adequate accounting
and information technology systems. Also, First Solar
Manufacturing GmbH cannot open any bank accounts (other than
those required by the credit facility), enter into any financial
liabilities (other than intercompany obligations, those
liabilities required by the credit facility or permitted
encumbrances), sell any assets to third parties outside the
normal course of business, make any loans or guarantees to third
parties, or allow any of its assets to be encumbered to the
benefit of third parties without the consent of the lenders and
government guarantors.
Our ability to withdraw cash from First Solar Manufacturing GmbH
for use in other parts of our business is restricted while we
have outstanding obligations under the credit facility and
associated government guarantees. First Solar Manufacturing
GmbHs cash flows from operations must generally be used
for the payment of loan interest, fees and principal before any
remainder can be used to pay intercompany charges, loans or
dividends. Furthermore, First Solar Manufacturing GmbH generally
cannot make any payments to affiliates if doing so would cause
its cash flow available for debt service to fall below 1.3 times
its required principal and interest payments for all its
liabilities for any one year period or cause the amount of its
equity to fall below 30% of the amount of its total assets.
First Solar Manufacturing GmbH also cannot pay commissions of
greater than 2% to First Solar affiliates that sell or
distribute its products. Also, we may be required under certain
circumstances to contribute more funds to First Solar
Manufacturing GmbH, such as if project-related costs exceed our
plan, we do not recover the expected amounts from governmental
investment subsidies or all or part of the government guarantees
are withdrawn. If there is a decline in the value of the assets
pledged as collateral for the credit facility, we may also be
required to pledge additional assets as collateral.
On July 26, 2006, we were approved to receive taxable
investment incentives
(Investitionszuschüsse) of approximately
21.5 million ($31.6 million at the balance sheet
close rate on December 29, 2007 of $1.47/1.00) from
the State of Brandenburg, Germany. These funds will reimburse us
for certain costs we will incur building our plant in
Frankfurt/Oder, Germany, including costs for the construction of
buildings and the purchase of machinery and equipment. Receipt
of these incentives is conditional upon the State of
Brandenburg, Germany having sufficient funds allocated to this
program to pay the reimbursements we claim. In addition, we are
required to operate our facility for a minimum of five years and
employ a specified number of associates during this period. Our
incentive approval expires on December 31, 2009. As of
December 29, 2007, we had received $29.5 million under
this program and we had accrued an additional $1.4 million
that we are eligible to receive under this program based on
qualifying expenditures that we had incurred through that date.
We are eligible to recover up to approximately
23.8 million ($35.0 million at the balance sheet
close rate on December 29, 2007 of $1.47/1.00) of
expenditures related to the construction of our plant in
Frankfurt/Oder, Germany under the German Investment Grant Act of
2005 (Investitionszulagen). This Act permits
us to claim tax-exempt reimbursements for certain costs we will
incur building our plant in Frankfurt/Oder, Germany, including
costs for the construction of buildings and the purchase of
machinery and equipment. Tangible assets subsidized under this
program have to remain in the region for at least five years. In
accordance with the administrative requirements of this Act, we
claimed reimbursement under the Act in conjunction with the
filing of our tax returns with the local German tax office
during the third quarter of fiscal 2007. In addition, this
program expired on December 31, 2006 and we can only claim
reimbursement for investments completed by this date. The
majority of our buildings and structures and our investment in
machinery and equipment were completed by this date. As of
December 29, 2007, we had accrued $34.4 million
eligible to be received under this program based on qualifying
expenditures that we had incurred through the expiration date.
During July 2006, we entered into a loan agreement, which we
amended and restated on August 7, 2006, with the Estate of
John T. Walton under which we could draw up to
$34.0 million. Interest was payable monthly at the annual
rate of the commercial prime lending rate; principal was to be
repaid at the earlier of January 2008 or the completion of an
initial public offering of our stock. This loan did not have any
collateral requirements. As a condition of obtaining this loan,
we were required to use a portion of the proceeds to repay the
principal of our loan from Kingston Properties, LLC, a related
party. During July 2006, we drew $26.0 million against this
loan,
49
$8.7 million of which we used to repay the Kingston
Properties, LLC loan. Upon completion of our initial public
offering in November 2006, we repaid the entire
$26.0 million loan balance.
During the year ended December 31, 2005, we received a
$15.0 million loan from the Director of Development of the
State of Ohio, $13.2 million of which was outstanding at
December 29, 2007. Interest is payable monthly at the
annual rate of 2.25%; principal payments commenced on
December 1, 2006 and end on July 1, 2015. Land and
buildings at our Ohio plant with a net book value of
$21.1 million at December 29, 2007 have been pledged
as collateral for this loan.
During the year ended December 25, 2004, we received a
$5.0 million loan from the Director of Development of the
State of Ohio, of which $3.3 million was outstanding at
December 29, 2007. Interest is payable monthly at annual
rates starting at 0.25% during the first year the loan is
outstanding, increasing to 1.25% during the second and third
years, 2.25% during the fourth and fifth years and increasing to
3.25% for each subsequent year; principal payments commenced on
January 1, 2007 and end on December 1, 2009. Machinery
and equipment at our Ohio plant with a net book value of
$7.7 million at December 29, 2007 have been pledged as
collateral for this loan.
On May 14, 2003, First Solar Property, LLC issued an
$8.7 million promissory note due June 1, 2010 to
Kingston Properties, LLC. The interest rate of the note was
3.70% per annum. We repaid this note in full in July 2006.
On February 22, 2006, we received $73.3 million from
the issuance of $74.0 million aggregate principal amount of
convertible senior subordinated notes, less $0.7 million of
issuance costs, to Goldman, Sachs & Co. On
May 10, 2006, we extinguished these notes by payment of
4,261,457 shares of our common stock.
Off-Balance
Sheet Arrangements
We had no off-balance sheet arrangements as of December 29,
2007.
Recent
Accounting Pronouncements
See Note 2 to the consolidated financial statements filed
with this Annual Report on
Form 10-K
for a summary of recent accounting pronouncements.
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Foreign
Exchange Risk
Our international operations accounted for approximately 98.8%
of our net sales in 2007 and 95.0% of our net sales in 2006; all
of which were denominated in euros. As a result, we have
exposure to foreign exchange risk with respect to almost all of
our net sales. Fluctuations in exchange rates, particularly in
the U.S. dollar to euro exchange rate, affect our gross and
net profit margins and could result in foreign exchange and
operating losses. Historically, most of our exposure to foreign
exchange risk has related to currency gains and losses between
the times we sign and settle our sales contracts. For example,
our Long Term Supply Contracts obligate us to deliver solar
modules at a fixed price in euros per watt and do not adjust for
fluctuations in the U.S. dollar to euro exchange rate. In
2007, a 10% change in foreign currency exchange rates would have
impacted our net sales by $50.4 million. With the expansion
of our manufacturing operations into Germany and the current
expansion into Malaysia, our operating expenses for the plants
in these countries will be denominated in the local currency.
Our primary foreign currency exposures are transaction, cash
flow and translation:
Transaction Exposure: We have certain assets
and liabilities, primarily receivables, investments and accounts
payable (including inter-company transactions) that are
denominated in currencies other than the relevant entitys
functional currency. In certain circumstances, changes in the
functional currency value of these assets and liabilities create
fluctuations in our reported consolidated financial position,
results of operations and cash flows. We may enter into foreign
exchange forward contracts or other instruments to minimize the
short-term foreign currency fluctuations on such assets and
liabilities. The gains and losses on the foreign exchange
forward contracts offset the transaction gains and losses on
certain foreign currency receivables, investments and payables
recognized in earnings.
50
As of December 29, 2007, we had a single outstanding
forward foreign exchange hedge contract with a notional value
equivalent to 20.0 million ($26.8 million at a
fixed exchange rate of $1.34/1.00), maturing in February
2009, to hedge our foreign currency transaction exposure.
Cash Flow Exposure: We have forecasted future
cash flows, including revenues and expenses, denominated in
currencies other than the relevant entitys functional
currency. Our primary cash flow exposures include future
customer collections and vendor payments. Changes in the
relevant entitys functional currency value will cause
fluctuations in the cash flows we expect to receive when these
cash flows are realized or settled. We may enter into foreign
exchange forward contracts or other derivatives to hedge the
value of a portion of these cash flows. We account for these
foreign exchange contracts as cash flow hedges. We initially
report the effective portion of the derivatives gain or
loss as a component of accumulated other comprehensive income
(loss) and subsequently reclassified this into earnings when the
transaction is settled.
The notional amount of our cash flow hedges receiving hedge
accounting treatment was 112.8 million
($165.8 million at the balance sheet close rate on
December 29, 2007 of $1.47/1.00) and the losses, net
of gains, recorded to accumulated other comprehensive income as
of December 31, 2007 were $3.2 million.
Earnings Translation Exposure: Fluctuations in
foreign currency exchange rates create volatility in our
reported results of operations because we are required to
consolidate financial statements of our foreign currency
denominated subsidiaries. We may decide to purchase forward
exchange contracts or other instruments to offset the impact of
currency fluctuations. Such contracts would be marked-to-market
on a monthly basis and any unrealized gain or loss would be
recorded in interest and other income, net. We do not hedge
translation exposure at this time but may do so in the future.
Interest
Rate Risk
We are exposed to interest rate risk because many of our
end-users depend on debt financing to purchase and install a
solar electricity generation system. Although the useful life of
a solar electricity generation system is approximately
25 years, end-users of our solar modules must pay the
entire cost of the system at the time of installation. As a
result, many of our end-users rely on debt financing to fund
their up-front capital expenditure and final project. An
increase in interest rates could make it difficult for our
end-users to secure the financing necessary to purchase and
install a system on favorable terms, or at all, and thus lower
demand for our solar modules and system development services and
reduce our net sales. In addition, we believe that a significant
percentage of our end-users install solar electricity generation
systems as an investment, funding the initial capital
expenditure through a combination of equity and debt. An
increase in interest rates could lower an investors return
on investment in a system or make alternative investments more
attractive relative to solar electricity generation systems,
which, in each case, could cause these end-users to seek
alternative investments that promise higher returns.
During July 2006, we entered into the IKB credit facility, which
bears interest at Euribor plus 1.6% for the term loan, Euribor
plus 2.0% for the bridge loan and Euribor plus 1.8% for the
revolving credit facility. As of December 29, 2007, we
hedged our exposure to changes in Euribor using interest rate
swaps with a combined notional value of 46.0 million
($67.6 million at the balance sheet close rate on
December 29, 2007 of $1.47/1.00).
In addition, we invest some of our cash in debt securities,
which exposes us to interest rate risk. The primary objective of
our investment activities is to preserve principal, while at the
same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities in
which we invest may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal
amount of the investment to fluctuate. For example, if we hold a
security that was issued with an interest rate fixed at the
then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably
decline. To minimize this risk, we maintain our portfolio of
cash equivalents and marketable securities in a variety of
securities, including money market funds, government and
non-government debt securities and certificates of deposit. As
of December 29, 2007, our fixed-income investments earned a
pretax yield of approximately 5.4%, with a weighted average
maturity of three months. If interest rates were to
instantaneously increase (decrease) by
51
100 basis points, the fair market value of our total
investment portfolio could decrease (increase) by approximately
$1.6 million.
Commodity
Risk
We are exposed to price risks associated with raw material and
component purchases, most significantly tellurium. Presently, we
purchase most of our cadmium telluride in compounded form from a
limited number of qualified suppliers. We have a long term
contract with one of our qualified cadmium telluride suppliers,
which provides for quarterly price adjustments based on the cost
of tellurium. Commencing in 2006, we entered into multi-year
tellurium supply contracts in order to mitigate potential cost
volatility and secure raw material supplies. We purchase from
our other qualified supplier on a purchase order basis. Because
the sale prices of solar modules in our Long Term Supply
Contracts do not adjust for raw material price increases and are
generally for a longer term than our raw materials and component
supply contracts, we may be unable to pass on increases in the
cost of our raw materials or components to many of our customers.
In addition, most of our key raw materials and components are
either sole-sourced or sourced from a limited number of
third-party suppliers. As a result, the failure of any of our
suppliers to perform could disrupt our supply chain and impair
our operations. If our existing suppliers fail to perform, we
will be required to identify and qualify new suppliers, a
process that can take up to 12 months depending on the raw
material or component. We might be unable to identify new
suppliers or qualify their products for use on our production
line on a timely basis and on commercially reasonable terms.
52
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Item 8:
|
Financial
Statements and Supplementary Data
|
Consolidated
Financial Statements
The consolidated financial statements of First Solar required by
this item are included in the section entitled
Consolidated Financial Statements of this Annual
Report on
Form 10-K.
See Item 15(a)(1) for a list of our consolidated financial
statements.
Selected
Quarterly Financial Data (Unaudited)
The following selected quarterly financial date should be read
in conjunction with our consolidated financial statements, the
related notes and Item 7: Managements
Discussion and Analysis of Financial Condition and Results of
Operations. This information has been derived from our
unaudited consolidated financial statements that, in our
opinion, reflect all recurring adjustments necessary to fairly
present this information when read in conjunction with our
consolidated financial statements and the related notes
appearing in the section entitled Consolidated Financial
Statements. The results of operations for any quarter are
not necessarily indicative of the results to be expected for any
future period.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 29,
|
|
|
Sep 29,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 30,
|
|
|
Sep 30,
|
|
|
Jul 1,
|
|
|
Apr 1,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
200,797
|
|
|
$
|
159,007
|
|
|
$
|
77,223
|
|
|
$
|
66,949
|
|
|
$
|
52,695
|
|
|
$
|
40,794
|
|
|
$
|
27,861
|
|
|
$
|
13,624
|
|
Cost of sales
|
|
|
89,847
|
|
|
|
76,967
|
|
|
|
48,852
|
|
|
|
36,907
|
|
|
|
27,080
|
|
|
|
24,537
|
|
|
|
18,761
|
|
|
|
10,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
110,950
|
|
|
|
82,040
|
|
|
|
28,371
|
|
|
|
30,042
|
|
|
|
25,615
|
|
|
|
16,257
|
|
|
|
9,100
|
|
|
|
3,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,432
|
|
|
|
3,854
|
|
|
|
3,763
|
|
|
|
3,058
|
|
|
|
1,649
|
|
|
|
1,657
|
|
|
|
1,536
|
|
|
|
1,519
|
|
Selling, general and administrative
|
|
|
24,191
|
|
|
|
27,082
|
|
|
|
17,285
|
|
|
|
13,690
|
|
|
|
10,950
|
|
|
|
8,393
|
|
|
|
8,133
|
|
|
|
5,872
|
|
Production
start-up
|
|
|
4,065
|
|
|
|
2,805
|
|
|
|
1,523
|
|
|
|
8,474
|
|
|
|
3,975
|
|
|
|
1,109
|
|
|
|
4,062
|
|
|
|
2,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,688
|
|
|
|
33,741
|
|
|
|
22,571
|
|
|
|
25,222
|
|
|
|
16,574
|
|
|
|
11,159
|
|
|
|
13,731
|
|
|
|
9,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
78,262
|
|
|
|
48,299
|
|
|
|
5,800
|
|
|
|
4,820
|
|
|
|
9,041
|
|
|
|
5,098
|
|
|
|
(4,631
|
)
|
|
|
(6,698
|
)
|
Foreign currency gain (loss)
|
|
|
1,165
|
|
|
|
965
|
|
|
|
21
|
|
|
|
(270
|
)
|
|
|
2,752
|
|
|
|
(298
|
)
|
|
|
2,190
|
|
|
|
900
|
|
Interest and other income (expense), net
|
|
|
6,713
|
|
|
|
4,385
|
|
|
|
2,043
|
|
|
|
3,759
|
|
|
|
1,270
|
|
|
|
(327
|
)
|
|
|
(43
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
86,140
|
|
|
|
53,649
|
|
|
|
7,864
|
|
|
|
8,309
|
|
|
|
13,063
|
|
|
|
4,473
|
|
|
|
(2,484
|
)
|
|
|
(5,872
|
)
|
Income tax (expense) benefit
|
|
|
(23,266
|
)
|
|
|
(7,615
|
)
|
|
|
36,554
|
|
|
|
(3,281
|
)
|
|
|
(5,025
|
)
|
|
|
(181
|
)
|
|
|
23
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
62,874
|
|
|
$
|
46,034
|
|
|
$
|
44,418
|
|
|
$
|
5,028
|
|
|
$
|
8,038
|
|
|
$
|
4,292
|
|
|
$
|
(2,461
|
)
|
|
$
|
(5,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.61
|
|
|
$
|
0.61
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
0.77
|
|
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.07
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.12
|
)
|
Weighted-average number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
78,192
|
|
|
|
75,666
|
|
|
|
72,596
|
|
|
|
72,347
|
|
|
|
63,968
|
|
|
|
56,137
|
|
|
|
54,358
|
|
|
|
50,777
|
|
Diluted
|
|
|
81,318
|
|
|
|
79,088
|
|
|
|
76,089
|
|
|
|
75,392
|
|
|
|
66,324
|
|
|
|
57,956
|
|
|
|
54,358
|
|
|
|
50,777
|
|
53
|
|
Item 9:
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A:
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
We maintain disclosure controls and procedures, as
such term is defined in
Rule 13a-15(e)
and 15d-15(e) under the Exchange Act, that are designed to
ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures
are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
control and procedure also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-K,
our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
|
|
(b)
|
Managements
Report on Internal Control over Financial Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 29, 2007 based on the criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the
United States of America.
We have excluded First Solar Electric, LLC from our assessment
of internal control over financial reporting as of
December 29, 2007 because it was acquired by us in a
purchase business combination consummated on November 30,
2007. First Solar Electric, LLC is a wholly owned subsidiary
whose total assets and total revenues represent approximately
three percent and one percent, respectively, of the related
consolidated financial statement amounts as of and for the year
ended December 29, 2007.
Based on the results of our evaluation, our management concluded
that our internal control over financial reporting was effective
as of December 29, 2007.
The effectiveness of our internal control over financial
reporting as of December 29, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
|
|
(c)
|
Changes
in Internal Control over Financial Reporting
|
There was no change in our internal control over financial
reporting that occurred during the fourth quarter ended
December 29, 2007 covered by this Annual Report on
Form 10-K
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
54
|
|
(d)
|
Inherent
Limitations on Effectiveness of Controls
|
Our management, including our Chief Executive Officer and Chief
Financial Officer, do not expect that our disclosure controls or
our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our
Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of a simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people or by management override of the controls. The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions,
or the degree of compliance with policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
|
|
Item 9B:
|
Other
Information
|
None.
PART III
|
|
Item 10:
|
Directors
and Executive Officers of the Registrant
|
Information concerning our board of directors appears in our
2008 Proxy Statement, under the section entitled
Directors. The information in that portion of the
Proxy Statement is incorporated in this Annual Report on
Form 10-K
by reference.
For information with respect to our executive officers, see
Part I, Item 1 of this Annual Report on
Form 10-K
under the heading entitled Executive Officers of the
Registrant.
Information concerning Section 16(a) beneficial ownership
reporting compliance appears in our 2008 Proxy Statement under
the section entitled Section 16(a) Beneficial
Ownership Reporting Compliance. The information in that
portion of the Proxy Statement is incorporated in this Annual
Report on
Form 10-K
by reference.
We have adopted a Statement of Corporate Code of Business
Conduct and Ethics that applies to all directors, officers and
employees of First Solar. Information concerning these codes
appears in our 2008 Proxy Statement under the section entitled
Proposal No. 1 Election of
Directors Corporate Governance. The
information in that portion of the Proxy Statement is
incorporated in this Annual Report on
Form 10-K
by reference.
|
|
Item 11:
|
Executive
Compensation
|
Information concerning executive compensation and related
information appears in our 2008 Proxy Statement under the
section entitled Executive Compensation and Related
Information. The information in that portion of the Proxy
Statement is incorporated in this Annual Report on
Form 10-K
by reference.
|
|
Item 12:
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information concerning the security ownership of certain
beneficial owners and management and related stockholder
matters, including information regarding our equity compensation
plans, appears in our 2008 Proxy Statement under the section
entitled Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters. The
information in that portion of the Proxy Statement is
incorporated in this Annual Report on
Form 10-K
by reference.
55
|
|
Item 13:
|
Certain
Relationships and Related Transactions
|
Information concerning certain relationships and related party
transactions appears in our 2008 Proxy Statement under the
section entitled Certain Relationships and Related Party
Transactions. The information in that portion of the Proxy
Statement is incorporated in this Annual Report on
Form 10-K
by reference.
|
|
Item 14:
|
Principal
Accountant Fees and Services
|
Information concerning principal accountant fees and services
and the audit committees pre-approval policies and
procedures appears in our 2008 Proxy Statement under the section
entitled Principal Accountant Fees and Services. The
information in that portion of the Proxy Statement is
incorporated in this Annual Report on
Form 10-K
by reference.
PART IV
|
|
Item 15:
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Members/Stockholders
Equity and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts
SCHEDULE II:
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2005, December 30,
2006 and December 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
at End of
|
|
Description
|
|
of Year
|
|
|
Additions
|
|
|
Deductions
|
|
|
Year
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
33
|
|
|
$
|
19
|
|
|
$
|
(48
|
)
|
|
$
|
4
|
|
Year ended December 30, 2006
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
Year ended December 29, 2007
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
(4
|
)
|
|
$
|
5
|
|
Reserve for excess and obsolete inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
31
|
|
|
$
|
60
|
|
|
$
|
(91
|
)
|
|
$
|
|
|
Year ended December 30, 2006
|
|
$
|
|
|
|
$
|
48
|
|
|
$
|
(37
|
)
|
|
$
|
11
|
|
Year ended December 29, 2007
|
|
$
|
11
|
|
|
$
|
45
|
|
|
$
|
(11
|
)
|
|
$
|
45
|
|
(3) Exhibits: See Item 15(b) below.
(b) Exhibits: The exhibits listed on the accompanying Index
to Exhibits on this
Form 10-K
are filed, or incorporated into this
Form 10-K
by reference.
(c) Financial Statement Schedule: See Item 15(a) above.
56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Phoenix, Arizona on
February 21, 2008.
FIRST SOLAR, INC.
Jens Meyerhoff
Chief Financial Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned
whose signature appears below constitutes and appoints Michael
J. Ahearn, Jens Meyerhoff and I. Paul Kacir and each of them,
the undersigneds true and lawful attorneys-in-fact and
agents with full power of substitution, for the undersigned and
in the undersigneds name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report
on
Form 10-K
and any other documents in connection therewith and to file the
same, with all exhibits thereto, with the SEC, granting unto
said attorneys-in-fact and agents and each of them, full power
and authority to do and perform each and every act requisite and
necessary to be done with respect to this Annual Report on
Form 10-K,
as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this
Power of Attorney as of the date indicated below.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
Principal Executive Officer and Director:
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL
J. AHEARN
Michael
J. Ahearn
|
|
Chief Executive Officer and Director
|
|
February 21, 2008
|
|
|
|
|
|
Principal Financial Officer and Principal Accounting Officer:
|
|
|
|
|
|
|
|
|
|
/s/ JENS
MEYERHOFF
Jens
Meyerhoff
|
|
Chief Financial Officer
|
|
February 21, 2008
|
|
|
|
|
|
Additional Directors:
|
|
|
|
|
|
|
|
|
|
/s/ JAMES
F. NOLAN
James
F. Nolan
|
|
Director
|
|
February 21, 2008
|
|
|
|
|
|
/s/ J.
THOMAS PRESBY
J.
Thomas Presby
|
|
Director
|
|
February 21, 2008
|
57
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ BRUCE
SOHN
Bruce
Sohn
|
|
Director
|
|
February 21, 2008
|
|
|
|
|
|
/s/ PAUL
H. STEBBINS
Paul
H. Stebbins
|
|
Director
|
|
February 21, 2008
|
|
|
|
|
|
/s/ MICHAEL
SWEENEY
Michael
Sweeney
|
|
Director
|
|
February 21, 2008
|
|
|
|
|
|
/s/ CRAIG
KENNEDY
Craig
Kennedy
|
|
Director
|
|
February 21, 2008
|
|
|
|
|
|
/s/ JOSE
VILLAREAL
Jose
Villareal
|
|
Director
|
|
February 21, 2008
|
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of First Solar, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of cash
flows, and of members/stockholders equity and
comprehensive income (loss) present fairly, in all material
respects, the financial position of First Solar, Inc. and its
subsidiaries at December 29, 2007 and December 30,
2006, and the results of their operations and their cash flows
for each of the three years in the period ended
December 29, 2007 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 29, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Companys internal control
over financial reporting based on our audits (which was an
integrated audit in 2007). We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 16 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation in 2005.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control
over Financial Reporting, management has excluded First Solar
Electric, LLC from its assessment of internal control over
financial reporting as of December 29, 2007 because it was
acquired by the Company in a purchase business combination
during 2007. We have also excluded First Solar Electric, LLC
from our audit of internal control over financial reporting.
First Solar Electric, LLC is a wholly owned subsidiary whose
total assets and total revenues represent approximately three
percent and one percent, respectively, of the related
consolidated financial statement amounts as of and for the year
ended December 29, 2007.
PricewaterhouseCoopers LLP
Phoenix, Arizona
February 21, 2008
59
FIRST
SOLAR, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
404,264
|
|
|
$
|
308,092
|
|
Marketable securities current
|
|
|
232,686
|
|
|
|
323
|
|
Accounts receivable, net
|
|
|
18,165
|
|
|
|
27,123
|
|
Inventories
|
|
|
40,204
|
|
|
|
16,510
|
|
Deferred project costs
|
|
|
2,643
|
|
|
|
|
|
Economic development funding receivable
|
|
|
35,877
|
|
|
|
27,515
|
|
Deferred tax asset, net current
|
|
|
3,890
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
64,780
|
|
|
|
8,959
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
802,509
|
|
|
|
388,522
|
|
Property, plant and equipment, net
|
|
|
430,104
|
|
|
|
178,868
|
|
Deferred tax asset, net noncurrent
|
|
|
51,811
|
|
|
|
|
|
Marketable securities noncurrent
|
|
|
32,713
|
|
|
|
|
|
Restricted investments
|
|
|
14,695
|
|
|
|
8,224
|
|
Goodwill
|
|
|
33,449
|
|
|
|
|
|
Other assets noncurrent
|
|
|
6,031
|
|
|
|
2,896
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,371,312
|
|
|
$
|
578,510
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
132,366
|
|
|
$
|
32,083
|
|
Short-term debt
|
|
|
24,473
|
|
|
|
16,339
|
|
Current portion of long-term debt
|
|
|
14,836
|
|
|
|
3,311
|
|
Other current liabilities
|
|
|
14,803
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
186,478
|
|
|
|
52,073
|
|
Accrued collection and recycling liabilities
|
|
|
13,079
|
|
|
|
3,724
|
|
Long-term debt
|
|
|
68,856
|
|
|
|
61,047
|
|
Other liabilities noncurrent
|
|
|
5,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
274,045
|
|
|
|
116,844
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies:
|
|
|
|
|
|
|
|
|
Employee stock options on redeemable shares
|
|
|
|
|
|
|
50,226
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share;
500,000,000 shares authorized; 78,575,211 and
72,331,964 shares issued and outstanding at
December 29, 2007 and December 30, 2006, respectively
|
|
|
79
|
|
|
|
72
|
|
Additional paid-in capital
|
|
|
1,079,775
|
|
|
|
555,749
|
|
Accumulated earnings (deficit)
|
|
|
12,895
|
|
|
|
(145,403
|
)
|
Accumulated other comprehensive income
|
|
|
4,518
|
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,097,267
|
|
|
|
411,440
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,371,312
|
|
|
$
|
578,510
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
60
FIRST
SOLAR, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
503,976
|
|
|
$
|
134,974
|
|
|
$
|
48,063
|
|
Cost of sales
|
|
|
252,573
|
|
|
|
80,730
|
|
|
|
31,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
251,403
|
|
|
|
54,244
|
|
|
|
16,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,107
|
|
|
|
6,361
|
|
|
|
2,372
|
|
Selling, general and administrative
|
|
|
82,248
|
|
|
|
33,348
|
|
|
|
15,825
|
|
Production
start-up
|
|
|
16,867
|
|
|
|
11,725
|
|
|
|
3,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,222
|
|
|
|
51,434
|
|
|
|
21,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
137,181
|
|
|
|
2,810
|
|
|
|
(4,790
|
)
|
Foreign currency gain (loss)
|
|
|
1,881
|
|
|
|
5,544
|
|
|
|
(1,715
|
)
|
Interest income
|
|
|
20,413
|
|
|
|
2,648
|
|
|
|
316
|
|
Interest expense, net
|
|
|
(2,294
|
)
|
|
|
(1,023
|
)
|
|
|
(418
|
)
|
Other (expense) income
|
|
|
(1,219
|
)
|
|
|
(799
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
155,962
|
|
|
|
9,180
|
|
|
|
(6,551
|
)
|
Income tax benefit (expense)
|
|
|
2,392
|
|
|
|
(5,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
158,354
|
|
|
|
3,974
|
|
|
|
(6,551
|
)
|
Cumulative effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
158,354
|
|
|
$
|
3,974
|
|
|
$
|
(6,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
2.12
|
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
Net income (loss)
|
|
$
|
2.12
|
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
Net income (loss) per share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
2.03
|
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
Net income (loss)
|
|
$
|
2.03
|
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
Weighted-average number of shares used in per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
74,701
|
|
|
|
56,310
|
|
|
|
48,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
77,971
|
|
|
|
58,255
|
|
|
|
48,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
61
FIRST
SOLAR, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Other
|
|
|
|
|
|
|
Membership Equity
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Units
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, December 25, 2004
|
|
|
41,540
|
|
|
$
|
165,742
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(142,915
|
)
|
|
$
|
(186
|
)
|
|
$
|
22,641
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,462
|
)
|
|
|
|
|
|
|
(6,462
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions from owner
|
|
|
3,674
|
|
|
|
16,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,663
|
|
Stock-based compensation from options
|
|
|
|
|
|
|
5,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,167
|
|
Reclassifications to employee stock options on redeemable shares
|
|
|
|
|
|
|
(25,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
45,214
|
|
|
|
162,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149,377
|
)
|
|
|
199
|
|
|
|
13,129
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
|
|
|
|
|
3,974
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803
|
|
|
|
803
|
|
Change in unrealized gain on derivative instruments designated
and qualifying as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions from owner
|
|
|
6,613
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Proceeds from sales of shares through share-based compensation
plans, net of excess tax benefits
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
Conversion of membership units into common shares
|
|
|
(51,827
|
)
|
|
|
(192,307
|
)
|
|
|
51,827
|
|
|
|
11
|
|
|
|
192,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
4,261
|
|
|
|
1
|
|
|
|
73,999
|
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
Common stock issued in initial public offering, net of offering
costs
|
|
|
|
|
|
|
|
|
|
|
16,193
|
|
|
|
16
|
|
|
|
302,634
|
|
|
|
|
|
|
|
|
|
|
|
302,650
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
11,682
|
|
|
|
|
|
|
|
|
|
|
|
11,682
|
|
Reclassifications to employee stock options on redeemable shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,961
|
)
|
Effect of stock split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
72,332
|
|
|
|
72
|
|
|
|
555,749
|
|
|
|
(145,403
|
)
|
|
|
1,022
|
|
|
|
411,440
|
|
Components of comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,354
|
|
|
|
|
|
|
|
158,354
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,116
|
|
|
|
5,116
|
|
Unrealized loss on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,648
|
)
|
|
|
(1,648
|
)
|
Unrealized gain on marketable securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of the adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
(56
|
)
|
Proceeds from sales of shares through share-based compensation
plans, net of excess tax benefits
|
|
|
|
|
|
|
|
|
|
|
2,125
|
|
|
|
2
|
|
|
|
40,367
|
|
|
|
|
|
|
|
|
|
|
|
40,369
|
|
Common stock issued for acquisition
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
1
|
|
|
|
28,066
|
|
|
|
|
|
|
|
|
|
|
|
28,067
|
|
Common stock issued in secondary offering, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
4
|
|
|
|
365,965
|
|
|
|
|
|
|
|
|
|
|
|
365,969
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,402
|
|
|
|
|
|
|
|
|
|
|
|
39,402
|
|
Reclassifications from employee stock options on redeemable
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,226
|
|
|
|
|
|
|
|
|
|
|
|
50,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 29, 2007
|
|
|
|
|
|
$
|
|
|
|
|
78,575
|
|
|
$
|
79
|
|
|
$
|
1,079,775
|
|
|
$
|
12,895
|
|
|
$
|
4,518
|
|
|
$
|
1,097,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
62
FIRST
SOLAR, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from customers
|
|
$
|
515,994
|
|
|
$
|
110,196
|
|
|
$
|
49,643
|
|
Cash paid to suppliers and employees
|
|
|
(276,525
|
)
|
|
|
(111,945
|
)
|
|
|
(44,674
|
)
|
Interest received
|
|
|
19,965
|
|
|
|
2,640
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
|
(2,294
|
)
|
|
|
(712
|
)
|
|
|
(322
|
)
|
Income tax
|
|
|
(19,002
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefit from share-based compensation arrangements
|
|
|
(30,196
|
)
|
|
|
(45
|
)
|
|
|
|
|
Other
|
|
|
(1,991
|
)
|
|
|
(710
|
)
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
205,951
|
|
|
|
(576
|
)
|
|
|
5,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(242,371
|
)
|
|
|
(153,150
|
)
|
|
|
(42,481
|
)
|
Purchase of marketable securities
|
|
|
(1,081,154
|
)
|
|
|
|
|
|
|
|
|
Proceeds from maturities and sales of marketable securities
|
|
|
787,783
|
|
|
|
|
|
|
|
|
|
Purchases of restricted investments
|
|
|
(6,008
|
)
|
|
|
(6,804
|
)
|
|
|
(1,267
|
)
|
Acquisitions, net of cash acquired
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
|
Other investments in long-term assets
|
|
|
|
|
|
|
(40
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(547,250
|
)
|
|
|
(159,994
|
)
|
|
|
(43,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
365,969
|
|
|
|
302,650
|
|
|
|
|
|
Proceeds from notes payable to a related party
|
|
|
|
|
|
|
36,000
|
|
|
|
20,000
|
|
Repayment of notes payable to a related party
|
|
|
|
|
|
|
(64,700
|
)
|
|
|
|
|
Repayment of long-term debt
|
|
|
(34,757
|
)
|
|
|
(135
|
)
|
|
|
|
|
Equity contributions
|
|
|
|
|
|
|
30,000
|
|
|
|
16,663
|
|
Proceeds from stock options exercised
|
|
|
10,173
|
|
|
|
100
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
49,368
|
|
|
|
132,330
|
|
|
|
15,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(1,497
|
)
|
|
|
|
|
Excess tax benefit from share-based compensation arrangements
|
|
|
30,196
|
|
|
|
45
|
|
|
|
|
|
Proceeds from economic development funding
|
|
|
9,475
|
|
|
|
16,766
|
|
|
|
|
|
Other financing activities
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
430,421
|
|
|
|
451,550
|
|
|
|
51,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
7,050
|
|
|
|
391
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
96,172
|
|
|
|
291,371
|
|
|
|
13,256
|
|
Cash and cash equivalents, beginning of year
|
|
|
308,092
|
|
|
|
16,721
|
|
|
|
3,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
404,264
|
|
|
$
|
308,092
|
|
|
$
|
16,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment acquisitions funded by liabilities
|
|
$
|
38,320
|
|
|
$
|
2,304
|
|
|
$
|
5,418
|
|
Non-cash conversion of debt and accrued interest to equity
|
|
|
|
|
|
|
74,000
|
|
|
|
|
|
Issuance of common stock for purchase acquisition
|
|
|
28,066
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
63
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
|
|
Note 1.
|
First
Solar and Its Business
|
We design, manufacture and sell solar electric power modules,
which we produce at our plant in Perrysburg, Ohio and our plant
in Frankfurt/Oder, Germany. First Solar Holdings, LLC was formed
as a Delaware limited liability company in May 2003 to act as
the holding company for First Solar, LLC, which was formed in
1999 and renamed First Solar US Manufacturing, LLC in the second
quarter of 2006, and other subsidiaries formed in 2003 and
later. On February 22, 2006, First Solar Holdings, LLC was
incorporated in Delaware as First Solar Holdings, Inc. and, also
during the first quarter of 2006, was renamed First Solar, Inc.
Upon our change in corporate organization on February 22,
2006, our membership units became common stock shares and our
unit options became share options on a one-for-one basis. For
clarity of presentation, we refer to our ownership interests as
shares or stock in the remainder of
these notes to our consolidated financial statements, although
prior to February 22, 2006 they were membership units.
First Solar, Inc. has wholly owned subsidiaries in Delaware,
Germany, Singapore, Mexico and Malaysia.
On October 30, 2006, our board of directors approved a 4.85
to 1 stock split of our common shares, which was effective
November 1, 2006; the par value of our common shares
remained $0.001 per share. All share and per share amounts
presented in these consolidated financial statements have been
retroactively adjusted to reflect the stock split.
On November 30, 2007, we acquired 100% of the outstanding
membership interests of Turner Renewable Energy, LLC for
$6.3 million in cash and 118,346 shares of our common
stock. See Note 5 for more information about this
acquisition.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Principles of consolidation. These
consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America and include the accounts of First Solar, Inc.
and all of its subsidiaries. We eliminated all intercompany
transactions and balances during consolidation.
Fiscal periods. We report the results of our
operations using a 52 or 53 week fiscal year, which ends on
the Saturday on or before December 31. Fiscal 2007 ended on
December 29, 2007 and included 52 weeks, fiscal 2006
ended on December 30, 2006 and included 52 weeks and
fiscal 2005 ended on December 31, 2005 and included
53 weeks. Our fiscal quarters end on the Saturday closest
to the end of the applicable calendar quarter.
Use of estimates. The preparation of
consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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 allowances for doubtful accounts
receivable, inventory write-downs, estimates of future cash
flows from and economic useful lives of long-lived assets, asset
impairments, certain accrued liabilities, income taxes and tax
valuation allowances, accrued warranty expenses, accrued
collection and recycling expense, share-based compensation costs
and fair value estimates. Actual results could differ materially
from these estimates under different assumptions and conditions.
Business Combinations. We account for business
acquisitions using the purchase method of accounting and record
definite lived intangible assets separate from goodwill.
Intangible assets are recorded at their fair value based on
estimates as at the date of acquisition. Goodwill is recorded as
the residual amount of the purchase price less the fair value
assigned to the individual assets acquired and liabilities
assumed as at the date of acquisition.
Goodwill. Goodwill represents the excess of
the purchase price of acquired companies over the estimated fair
value assigned to the individual assets acquired and liabilities
assumed. We do not amortize goodwill, but instead test goodwill
for impairment at least annually in the fourth quarter and, if
necessary, would record any impairment in accordance with
FAS 142, Goodwill and Other Intangible Assets.
We will perform the first annual impairment review in the fourth
quarter of fiscal 2008 or earlier if facts and circumstances
warrant a review. In the process of our annual impairment
review, we primarily use the income approach methodology of
valuation that
64
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
includes the discounted cash flow method as well as other
generally accepted valuation methodologies to determine the fair
value of our goodwill. Significant management judgment is
required in the forecasts of future operating results that are
used in the discounted cash flow method of valuation.
Fair value estimates. The fair value of an
asset or liability is the amount at which it could be exchanged
or settled in a current transaction between willing parties. The
carrying values for cash and cash equivalents, current and
noncurrent marketable securities, restricted investments,
accounts receivable, accounts payable and accrued liabilities
and other current assets and liabilities approximate their fair
values due to their short maturities. The carrying value of the
portion of our long term debt with stated interest rates
reflects its fair value based on current rates afforded to us on
debt with similar maturities and characteristics.
Foreign currency translation. The functional
currencies of our German and Mexican subsidiaries are their
local currency. Accordingly, we apply the period end exchange
rate to translate their assets and liabilities and the weighted
average exchange rate for the period to translate their
revenues, expenses, gains and losses into U.S. dollars. We
include the translation adjustments as a separate component of
accumulated other comprehensive income within stockholders
equity. The functional currency of our subsidiaries in Malaysia
and Singapore is the U.S. dollar, so we do not need to
translate their financial statements.
Cash and cash equivalents. We consider all
highly liquid investments with original or remaining maturities
of 90 days or less when purchased to be cash equivalents.
Marketable securities
current. Marketable securities with maturities
greater than 90 days, but less than one-year at purchase
are recorded as marketable securities current. We
have classified our marketable securities as
available-for-sale. Such marketable securities are
recorded at fair value and unrealized gains and losses are
recorded to accumulated other comprehensive income (loss) until
realized. Realized gains and losses on sales of all such
securities are reported in earnings, computed using the specific
identification cost method. All of our available-for-sale
marketable securities are subject to a periodic impairment
review. We consider our marketable debt securities impaired,
when a significant decline in the issuers credit quality
is likely to have a significant adverse effect on the fair value
of the investment. Investments identified as being impaired are
subject to further review to determine if the investment is
other than temporarily impaired, in which case the investment is
written down to its impaired value and a new cost basis is
established.
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.
We also 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 estimated
market value. For example, we regularly evaluate the quantity
and value of our inventory 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 historic usage, expected demand,
anticipated sales price, new product development schedules, the
effect new products might have on the sale of existing products,
product obsolescence, customer concentrations, product
merchantability and other factors. Market conditions are subject
to change and actual consumption of our inventory could differ
from forecast demand. Our inventories have a long life cycle and
obsolescence has not historically been a significant factor in
their valuation.
Deferred project costs. Deferred project costs
represents uninstalled materials relating to customer contracts.
These costs are recognized as deferred assets until installed.
Deferred project costs as of December 29, 2007 were
$2.6 million.
Property, plant and equipment. We report our
property, plant and equipment at cost, less accumulated
depreciation. Cost includes the price paid to acquire or
construct the assets, including interest capitalized during the
65
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
construction period and any expenditures that substantially add
to the value of or substantially extend the useful life of an
existing asset. We expense repair and maintenance costs when
they are incurred.
We compute depreciation expense using the straight-line method
over the estimated useful lives of the assets, as presented in
the table below. We amortize leasehold improvements over the
shorter of their estimated useful lives or the remaining term of
the lease.
|
|
|
|
|
Useful Lives
|
|
|
in Years
|
|
Buildings
|
|
40
|
Manufacturing machinery and equipment
|
|
5 7
|
Furniture, fixtures, computer hardware and computer software
|
|
3 5
|
Leasehold improvements
|
|
15
|
Long-lived assets. We account for our
long-lived, tangible assets and definite-lived intangible assets
in accordance with Statement of Financial Accounting Standards
No. (SFAS) 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. 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 the long-lived asset may not be recoverable.
These events would 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
significant negative industry or economic trends. We evaluated
our long-lived assets for impairment during 2007 and did not
note any triggering event that the carrying values of material
long-lived asset are not recoverable.
Marketable securities
noncurrent. Marketable securities with maturities
greater than one year are recorded as marketable
securities noncurrent. We have classified our
marketable securities as available-for-sale. Such
marketable securities are recorded at fair value and unrealized
gains and losses are recorded to accumulated other comprehensive
income (loss) until realized. Realized gains and losses on sales
of all such securities are reported in earnings, computed using
the specific identification cost method. All of our
available-for-sale marketable securities are subject to a
periodic impairment review. We consider our marketable debt
securities impaired, when a significant decline in the
issuers credit quality is likely to have a significant
adverse effect on the fair value of the investment. Investments
identified as being impaired are subject to further review to
determine if the investment is other than temporarily impaired,
in which case the investment is written down to its impaired
value and a new cost basis is established.
Economic development funding. We are eligible
for economic development funding from various German
governmental entities for certain of our capital expenditures.
We record a receivable for these funds when our legal right to
them exists and all criteria for receiving the funds have been
met. We deduct the amount of the funds from the acquisition
costs of the related assets, which will reduce the depreciation
expense that we otherwise would have to recognize in future
periods. See note 6 for a description of this economic
development funding.
Product warranties. We provide a limited
warranty to the original purchasers of our solar modules for
five years against defects in materials and workmanship under
normal use and service conditions following the date of sale,
and we provide a warranty that the modules will produce at least
90% of their power output rating during the first 10 years
following the date of sale 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
module or, under the power output warranty, providing additional
modules to remedy the power shortfall. Our warranties are
automatically transferred from the original purchaser of our
modules to a subsequent purchaser. When we recognize revenue for
module sales, we accrue a liability for the estimated future
costs of meeting our warranty obligations for those modules. We
make and revise this estimate based on the number of solar
modules under warranty at customer locations, our historical
experience with warranty
66
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
claims, our monitoring of field installation sites, our in-house
testing of our solar modules and our estimated per-module
replacement cost.
Environmental remediation liabilities. We
record environmental remediation liabilities when environmental
assessments
and/or
remediation efforts are probable and the costs can be reasonably
estimated. We estimate these costs based on current laws and
regulations, existing technology and the most likely method of
remediation. We do not discount these costs and we exclude the
effects of possible inflation and other economic factors. If our
cost estimates result in a range of equally probable amounts, we
accrue the lowest amount in the range.
End of life collection and recycling. We
recognize an expense for the estimated fair value of our future
obligations for collecting and recycling the solar modules that
we have sold at the time they reach the end of their useful
lives. See note 12 for further information about this
obligation and how we account for it.
Revenue recognition. We sell our products
directly to system integrators and recognize revenue when
persuasive evidence of an arrangement exists, delivery of the
product has occurred and title and risk of loss has passed to
the customer, the sales price is fixed or determinable and
collectability of the resulting receivable is reasonably
assured. This policy is in accordance with the requirements of
SEC Staff Accounting Bulletin No. (SAB) 101, Revenue
Recognition in Financial Statements, as amended by
SAB 104, Revision of Topic 13 (Revenue Recognition).
Under this policy, we record a trade receivable for the selling
price of our product and reduce inventory for the cost of goods
sold when delivery occurs in accordance with the terms of the
respective sales contracts. During 2006, we changed the terms of
our sales contracts with all of our significant customers to
provide that delivery occurs when we deliver our products to the
carrier, rather than when the products are received by our
customer, as had been our terms under our prior contracts. This
change in the terms of our sales contracts resulted in a
one-time increase to our net sales of $5.4 million during
the year ended December 30, 2006. We do not offer extended
payment terms or rights of return for our sold products.
With our acquisition of Turner Renewable Energy, LLC on
November 30, 2007, a portion of our revenues has been
derived from long-term contracts that we account for under the
provisions of the American Institute of Certified Public
Accountants Statement of Position No. (SOP)
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Accordingly, we recognize
revenues and estimated profits on performance contracts, which
are cost-type or fixed-fee contracts to design and develop solar
electricity generation systems, under the percentage of
completion method of accounting using the cost-to-cost
methodology. We use this method because we consider costs
incurred to be the best available measure of progress on these
contracts. We make estimates of the costs to complete a contract
and recognize revenue based on the estimated progression to
completion. We periodically revise our profit estimates based on
changes in facts, and we will immediately recognize any losses
that we may identify on contracts.
Incurred costs include all direct material, labor, subcontractor
cost, and those indirect costs related to contract performance,
such as indirect labor, supplies and tools. We include job
material costs when the job materials have been installed. Where
contracts specify that title to job materials transfers to the
customer before installation has been performed, we defer
revenue and recognize it upon installation, using the
percentage-of-completion method of accounting. We consider job
materials to be installed materials when they are permanently
attached or fitted to the solar power systems as required by the
engineering design.
As of December 29, 2007, our liability for billings
in excess of costs and estimated earnings, which is part
of the balance sheet caption accounts payable and accrued
liabilities, was $2.1 million. This liability
represents our billings in excess of revenues recognized on our
contracts, which results from differences between contractual
billing schedules and the timing of revenue recognition under
our revenue recognition accounting policies.
We also have a limited number of arrangements that include
multiple deliverables. These are contracts under which we both
provide design and consulting services for and supply parts and
equipment for solar electricity generation systems. We follow
the guidance in Emerging Issues Task Force Issue No. (EITF)
00-21,
Revenue Arrangements with Multiple Deliverables, when
accounting for these arrangements in order to determine whether
67
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
they have more than one unit of accounting. According to
EITF 00-21,
deliverable elements in a revenue arrangement with multiple
deliverables are separate units of accounting if the elements
have standalone value to the customer, if objective and reliable
evidence of the fair value of undelivered elements is available,
and if the arrangement does not include a general right of
return related to delivered items. We determined that our design
and supply arrangements generally consist of two elements that
qualify as separate units of accounting, the provision of design
and consulting services and the supply of solar electricity
generation system parts and equipment. We apply the same revenue
recognition principles (from SAB 104) as we use for
our arrangements for the stand-alone sales of products to the
recognition of revenue on the parts and equipment unit of
accounting of our multiple deliverable arrangements. We
recognize revenue from the design and consulting services unit
of accounting using the percentage of completion method in
accordance with
SOP 81-1.
In accordance with EITF Issue
No. 06-3,
How Taxes collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income
Statement (that is, Gross versus Net Presentation), we
present taxes assessed by governmental authorities that are both
imposed on and concurrent with specific revenue-producing
transactions between us and our customers (such as sales, use
and value-added taxes) on a net basis, excluded from revenues.
Shipping and handling costs. Shipping and
handling costs are classified as a component of cost of sales.
Customer payments of shipping and handling costs are recorded as
a component of net sales.
Share-based compensation. We account for
share-based compensation arrangements in accordance with
SFAS 123 (revised 2004) (SFAS 123(R)),
Share-Based Payments, which we adopted during the first
quarter of the year ended December 31, 2005 using the
modified retrospective method of transition. Our
significant accounting policies related to share-based
compensation arrangements are described at note 16.
Research and development expense. Research and
development costs are incurred during the process of researching
and developing new products and enhancing our existing products,
technologies and manufacturing processes and consist primarily
of compensation and related costs for personnel, materials,
supplies, equipment depreciation and consultant and laboratory
testing costs. We expense these costs as incurred until the
resulting product has been completed and tested and is ready for
commercial manufacturing.
We are party to several research grant contracts with the
U.S. federal government under which we receive
reimbursements for specified costs incurred for certain of our
research projects. We record amounts recoverable from these
grants as an offset to research and development expense when the
related research and development costs are incurred, which is
consistent with the timing of our contractual right to receive
the cost reimbursement. We have included grant proceeds of
$1.8 million, $0.9 million and $0.9 million as
offsets to research and development expense during the years
ended December 29, 2007, December 30, 2006 and
December 31, 2005, respectively.
Production
start-up. Production
start-up
expense consists primarily of salaries and personnel-related
costs and the cost of operating a production line before it has
been qualified for full production, including the cost of raw
materials for solar modules run through the production line
during the qualification phase. It also includes all expenses
related to the selection of a new site and the related legal and
regulatory costs, to the extent we cannot capitalize the
expenditure.
Income taxes. First Solar Holdings, LLC was
formed as a limited liability company and, accordingly, was not
subject to U.S. federal or state income taxes, although
certain of its foreign subsidiaries were subject to income taxes
in their local jurisdictions. However, upon incorporation as
First Solar, Inc. during the first quarter of 2006, the company
became subject to U.S. federal and state income taxes.
We account for income taxes using the asset and liability
method, in accordance with SFAS 109, Accounting for
Income Taxes. Under this method, we recognize deferred tax
assets and liabilities for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit
carryforwards. We measure deferred tax assets and
68
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
liabilities using the enacted tax laws expected to apply to
taxable income in the years in which we expect those temporary
differences to be recovered or settled; we will recognize the
effect on deferred tax assets and liabilities of a change in tax
laws in the results of our operations during the period that
includes the enactment date. We record valuation allowances to
reduce deferred tax assets when we determine that it is more
likely than not that some or all of the deferred tax assets will
not be realized.
We operate in multiple taxing jurisdictions under several legal
forms. As a result, we are subject to the jurisdiction of a
number of U.S. and
non-U.S. tax
authorities and to tax agreements and treaties among these
authorities. Our operations in these different jurisdictions are
taxed on various bases, including income before taxes calculated
in accordance with jurisdictional regulations. Determining our
taxable income in any jurisdiction requires the interpretation
of the relevant tax laws and regulations and the use of
estimates and assumptions about significant future events,
including the following: the amount, timing and character of
deductions; permissible revenue recognition methods under the
tax law; and the sources and character of income and tax
credits. Changes in tax laws, regulations, agreements and
treaties, currency exchange restrictions, or our level of
operations or profitability in each taxing jurisdiction could
have an impact on the amount of income tax assets, liabilities,
expenses and benefits that we record during any given period.
See note 18 for more information about the impact of income
taxes on our financial position and results of operations.
Per share data. Basic income (loss) per share
is based on the weighted effect of all common shares outstanding
and is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during the period.
Diluted income (loss) per share is based on the weighted effect
of all common shares and dilutive potential common shares
outstanding and is calculated by dividing net income (loss) by
the weighted average number of common shares and dilutive
potential common shares outstanding during the period.
Comprehensive income (loss). Our comprehensive
income (loss) consists of our net income (loss), changes in
unrealized gains or losses on derivative instruments that we
hold and that qualify as and that we have designated as cash
flow hedges and the effects on our consolidated financial
statements of translating the financial statements of our
subsidiaries that operate in foreign currencies. In addition,
other comprehensive income (loss) includes unrealized gains
(losses) on available-for-sale securities, the impact of which
has been excluded from net income. We present our comprehensive
income (loss) in combined consolidated statements of
members/stockholders equity and comprehensive income
(loss). Our accumulated other comprehensive income (loss) is
presented as a component of equity in our consolidated balance
sheets and consists of the cumulative amount of net financial
statement translation adjustments, unrealized gains or losses on
cash flow hedges and unrealized gains or losses on available for
sale marketable securities that we have incurred since the
inception of our business.
Recent accounting pronouncements. In July
2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 48, Accounting for Uncertainty
in Income Taxes. Tax law is subject to significant and
varied interpretation, so an enterprise may be uncertain whether
a tax position that it has taken will ultimately be sustained
when it files its tax return. FIN 48 establishes a
more-likely-than-not threshold that must be met
before a tax benefit can be recognized in the financial
statements and, for those benefits that may be recognized,
stipulates that enterprises should recognize the largest amount
of the tax benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the
taxing authority. FIN 48 also addresses changes in
judgments about the realizability of tax benefits, accrual of
interest and penalties on unrecognized tax benefits,
classification of liabilities for unrecognized tax benefits and
related financial statement disclosures. We adopted FIN 48
at the beginning of fiscal 2007. The adoption of FIN 48
increased our reserves for uncertain tax positions by
$0.1 million, which we recorded as a cumulative effect
adjustment to equity in accordance with the transition guidance
in FIN 48.
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 158 is effective for fiscal
years beginning after
69
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
November 15, 2007. We are currently evaluating the impact
of SFAS 157 on our financial position, results of
operations and cash flows.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities.
SFAS 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value and to
report unrealized gains and losses on those assets and
liabilities in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. We do not expect
the adoption of SFAS 159 to have a material effect on our
financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS 141R,
Business Combinations, which replaces
SFAS 141. SFAS 141R requires most assets acquired and
liabilities assumed in a business combination, contingent
consideration and certain acquired contingencies to be measured
at their fair value as of the date of the acquisition.
SFAS 141R also requires that acquisition related costs and
restructuring costs be recognized separately from the business
combination. SFAS 141R will be effective for us for fiscal
year 2009 and will be effective for business combinations
entered into after December 27, 2008.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interest in Consolidated Financial
Statements. SFAS 160 amends previous accounting
literature to establish new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS is effective for us as of
the beginning of fiscal 2010. We have not yet evaluated the
impact, if any, the adoption of this Statement will have our
financial position, results of operations or cash flows.
|
|
Note 3.
|
Initial
Public Offering
|
The Securities and Exchange Commission declared our first
registration statements effective on November 16, 2006,
which we filed on
Form S-1
(Registration
No. 333-135574)
and pursuant to Rule 462(b) (Registration
No. 333-138779)
under the Securities Act of 1933 in connection with the initial
public offering of our common stock. Under these registration
statements, we registered 22,942,500 shares of our common
stock, including 2,942,500 subject to an underwriters
over-allotment option. We registered 16,192,500 of these shares
on our own behalf and 6,750,000 of these shares on behalf of
certain of our stockholders, including one of our executive
officers. In November 2006, we completed our initial public
offering, in which we sold all of these shares that we
registered on our behalf and on behalf of the selling
stockholders, for an aggregate public offering price of
$458.9 million, which included $58.9 million from the
underwriters exercise of their over-allotment option. Of
the $458.9 million of total gross proceeds, we received
gross proceeds of $323.9 million, against which we charged
$16.6 million of underwriting discounts and commissions and
$4.6 million of other costs of the offering, resulting in a
net increase in our paid-in capital of $302.7 million. The
remaining $135.0 million of gross proceeds went to selling
stockholders; they applied $8.4 million to underwriting
discounts and commissions and received $126.6 million of
the offering proceeds. During the year ended December 29,
2007 we received reimbursement for $0.2 million of offering
costs of our initial public offering. We recorded this
reimbursement to our additional paid-in capital.
|
|
Note 4.
|
Follow-On
Public Offering
|
The Securities and Exchange Commission declared our follow-on
registration statement effective on August 9, 2007, which
we filed on
Form S-1
(Registration
No. 333-144714)
under the Securities Act of 1933 in connection with the
follow-on public offering of our common stock. Under this
registration statement, we and certain of our stockholders
offered 6,500,000 shares of our common stock, with an
aggregate public offering price of $617.5 million. We
registered 4,000,000 of these shares on our behalf and 2,500,000
of these shares on behalf of certain of our stockholders,
including certain of our executive officers, two of which are
also directors of ours. In addition, a selling stockholder had
granted the underwriters the right to purchase up to an
additional 975,000 shares of common stock to cover
over-allotments.
70
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
On August 13, 2007, we completed our follow-on offering in
which we sold 4,000,000 shares of our common stock and the
selling stockholders sold 2,500,000 shares of our common
stock. The sale of shares of our common stock resulted in
aggregate gross proceeds of approximately $380.0 million,
approximately $14.0 million of which we applied to
underwriting discounts and commissions. As a result, we received
approximately $366.0 million of the offering proceeds.
|
|
Note 5.
|
Business
Combination
|
Turner
Renewable Energy, LLC Acquisition
On November 30, 2007, we acquired 100% of the outstanding
membership interests of Turner Renewable Energy, LLC. The
acquisition added a balance of plant engineering and project
management skills to us that enables us to begin deploying cost
effective solar electricity solutions for utility companies
seeking to meet renewable energy portfolio standard requirements
in U.S. markets. In connection with this acquisition we
issued an aggregate of 118,346 shares of our common stock
to the members of Turner Renewable Energy, LLC in satisfaction
of a portion of the purchase price. The fair value of our common
stock issued was determined based on the closing price of our
common stock on November 30, 2007. The results of Turner
Renewable Energy, LLC have been included in our consolidated
results of operations from December 1, 2007.
The total consideration related to the acquisition is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
Shares
|
|
|
November 30, 2007
|
|
|
Purchase consideration:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
6,261
|
|
Common stock
|
|
|
118,346
|
|
|
|
28,066
|
|
Exit costs
|
|
|
|
|
|
|
177
|
|
Direct transaction costs
|
|
|
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Total purchase consideration
|
|
|
|
|
|
$
|
35,010
|
|
|
|
|
|
|
|
|
|
|
Purchase
Price Allocation
Under the purchase method of accounting, we allocated the total
purchase price shown in the table above to Turner Renewable
Energy, LLCs net tangible and intangible assets based on
their estimated fair values as of November 30, 2007. The
fair values assigned are based on our estimates and assumptions
of management. Our purchase price allocation is substantially
complete as of December 29, 2007. However, we may be
subject to goodwill adjustments as additional information
relating to deferred tax liabilities becomes available. We do
not expect these changes will be material.
The allocation of the purchase price and the estimated useful
lives associated with certain assets on November 30, 2007
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Amount
|
|
|
Useful Life
|
|
Net liabilities assumed
|
|
$
|
(176
|
)
|
|
N.A.
|
Customer contracts in progress
|
|
|
170
|
|
|
6 months
|
Customer contracts not started
|
|
|
1,620
|
|
|
12 months
|
Deferred tax liability
|
|
|
(53
|
)
|
|
N.A.
|
Goodwill
|
|
|
33,449
|
|
|
N.A.
|
|
|
|
|
|
|
|
Total purchase consideration
|
|
|
35,010
|
|
|
|
|
|
|
|
|
|
|
71
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Net tangible assets acquired on November 30, 2007 consisted
of the following (in thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Cash and cash equivalents
|
|
$
|
760
|
|
Accounts receivable, net
|
|
|
5,511
|
|
Inventories
|
|
|
2,237
|
|
Deferred project costs
|
|
|
4,976
|
|
Prepaid expenses and other assets
|
|
|
203
|
|
Fixed assets, net
|
|
|
160
|
|
|
|
|
|
|
Total assets acquired
|
|
|
13,847
|
|
Accounts payable
|
|
$
|
3,841
|
|
Accrued expenses
|
|
|
1,560
|
|
Billings in excess of costs and estimated earnings
|
|
|
4,141
|
|
Warranty accrual
|
|
|
349
|
|
Line of credit
|
|
|
4,074
|
|
Deferred rent
|
|
|
58
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
14,023
|
|
|
|
|
|
|
Net liabilities assumed
|
|
|
(176
|
)
|
|
|
|
|
|
Acquired identifiable intangible assets. We
determined the fair value attributable to customer contracts
(contracts already in progress and contracts not started) using
projected cash flow generation from these customer contracts. We
calculated the present value of these projected contracts using
a discount rate of 10.7% for contracts already in progress and
12.7% for contracts not started yet. The fair value of these
intangible assets is amortized over 6 and 12 months,
respectively. Amortization expense for the three and twelve
months ended December 29, 2007 was $28,000.
Goodwill. We allocated $33.4 million to
goodwill, which represents the excess of the purchase price over
the fair value of the identifiable net tangible asset and
intangible assets of Turner Renewable Energy, LLC. In accordance
with SFAS No. 142, Goodwill and Other
Intangible Assets, we review our goodwill for
impairment annually, or more frequently if facts and
circumstances warrant a review. Goodwill that resulted from the
acquisition of Turner Renewable Energy, LLC is not deductible
for tax purposes.
|
|
Note 6.
|
Economic
Development Funding
|
On July 26, 2006, we were approved to receive taxable
investment incentives
(Investitionszuschüsse) of approximately
21.5 million ($31.6 million at the balance sheet
close rate on December 29, 2007 of $1.47/1.00) from
the State of Brandenburg, Germany. These funds will reimburse us
for certain costs we incurred building our plant in
Frankfurt/Oder, Germany, including costs for the construction of
buildings and the purchase of machinery and equipment. Receipt
of these incentives is conditional upon the State of Brandenburg
having sufficient funds allocated to this program to pay the
reimbursements we claim. In addition, we are required to operate
our facility for a minimum of five years and employ a specified
number of associates during this period. Our incentive approval
expires on December 31, 2009. As of December 29, 2007,
we had received cash payments of $29.5 million under this
program, and we had accrued an additional $1.4 million that
we are eligible to receive under this program based on
qualifying expenditures that we had incurred through that date.
We are eligible to recover up to approximately
23.8 million ($35.0 million at the balance sheet
close rate on December 29, 2007 of $1.47/1.00) of
expenditures related to the construction of our plant in
Frankfurt/Oder, Germany under the German Investment Grant Act of
2005 (Investitionszulagen). This act permits
us to claim tax-
72
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
exempt reimbursements for certain costs we incurred building our
plant in Frankfurt/Oder, Germany, including costs for the
construction of buildings and the purchase of machinery and
equipment. Tangible assets subsidized under this program have to
remain in the region for at least five years. In accordance with
the administrative requirements of this act, we claimed
reimbursement under the Act in conjunction with the filing of
our tax returns with the local German tax office during the
third quarter of fiscal 2007. In addition, this program expired
on December 31, 2006, and we can only claim reimbursement
for investments completed by that date. The majority of our
buildings and structures and our investment in machinery and
equipment were completed by this date. As of December 29,
2007, we had accrued $34.4 million that we are eligible to
receive under this program based on qualifying expenditures that
we had incurred through the expiration date. We collected this
receivable subsequent to December 29, 2007.
|
|
Note 7.
|
Marketable
Securities
|
We have classified our marketable securities as
available-for-sale. Our marketable securities are
recorded at fair value and net unrealized gains and losses are
recorded as part of other comprehensive income until realized.
We report realized gains and losses on the sale of our
marketable securities are reported in earnings, computed using
the specific identification method. During the year ended
December 29, 2007, we did not realize any gains or losses
on our marketable securities.
We determined market values for each individual security in the
investment portfolio using third party market quotes. All of our
available-for-sale marketable securities are subject to a
periodic impairment review. We consider our marketable debt
securities impaired, when a significant decline in the
issuers credit quality is likely to have a significant
adverse effect on the fair value of the investment. Investments
identified as being impaired are subject to further review to
determine if the investment is other than temporarily impaired,
in which case the investment is written down to its impaired
value and a new cost basis is established.
A summary of available-for-sale marketable securities by major
security type as of December 29, 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. government obligations
|
|
$
|
94,862
|
|
|
$
|
39
|
|
|
$
|
2
|
|
|
$
|
94,899
|
|
Commercial paper (non asset-backed)
|
|
|
58,954
|
|
|
|
13
|
|
|
|
46
|
|
|
|
58,921
|
|
Municipal debt
|
|
|
111,486
|
|
|
|
93
|
|
|
|
|
|
|
|
111,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
265,302
|
|
|
$
|
145
|
|
|
$
|
48
|
|
|
$
|
265,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities of our available-for-sale marketable
securities as of December 29, 2007 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
Maturity
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
One year or less
|
|
$
|
150,492
|
|
|
$
|
88
|
|
|
$
|
48
|
|
|
$
|
150,532
|
|
One year to five years
|
|
|
42,051
|
|
|
|
48
|
|
|
|
|
|
|
|
42,099
|
|
Five years or more
|
|
|
72,759
|
|
|
|
9
|
|
|
|
|
|
|
|
72,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
265,302
|
|
|
$
|
145
|
|
|
$
|
48
|
|
|
$
|
265,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net $0.1 million unrealized gain on our investments as
of December 29, 2007 was primarily a result of changes in
interest rates. We typically invest in highly-rated securities
with low probabilities of default. Our investment policy
requires investments to be rated single A or better, limits the
types of acceptable investments, limits the concentration as to
security holder and limits the duration of the investment.
73
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Marketable securities current of $0.3 million
at December 30, 2006 consisted of a deposit account. The
carrying value of this account approximated its fair value due
to its short maturity.
|
|
Note 8.
|
Consolidated
Balance Sheet Details
|
Accounts
receivable, net
Accounts receivable, net consisted of the following at
December 29, 2007 and December 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts receivable, gross
|
|
$
|
18,170
|
|
|
$
|
27,127
|
|
Allowance for doubtful accounts
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
18,165
|
|
|
$
|
27,123
|
|
|
|
|
|
|
|
|
|
|