form10-q.htm



 
 

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

Form 10-Q

(Mark one)
 
   
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended March 27, 2010
   
 
or
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                                                         to                   

Commission file number: 001-33156

First Solar, Inc.
(Exact name of registrant as specified in its charter)

Delaware
20-4623678
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

350 West Washington Street, Suite 600
Tempe, Arizona 85281
(Address of principal executive offices, including zip code)

(602) 414-9300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer R
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
   
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £    No R

As of April 23, 2010 there were 85,291,195 shares of the registrant’s common stock, par value $0.001, outstanding.
 
 
 
 
 


 
 
 
 
 
FIRST SOLAR, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2010

TABLE OF CONTENTS

   
Page
Part I.
Financial Information (Unaudited)
 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the three months ended March 27, 2010 and March 28, 2009
1
 
Condensed Consolidated Balance Sheets as of March 27, 2010 and December 26, 2009
2
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 27, 2010 and March 28, 2009
3
 
Notes to Condensed Consolidated Financial Statements
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 4.
Controls and Procedures
41
Part II.
Other Information
42
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 6.
Exhibits
43
Signature
 
44
Exhibit Index
45
 

 
 
 
 

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
 
   
March 27,
2010
   
March 28,
2009
 
Net sales
 
$
567,961
   
$
418,208
 
Cost of sales
   
285,925
     
182,924
 
Gross profit
   
282,036
     
235,284
 
Operating expenses:
               
Research and development
   
22,888
     
11,704
 
Selling, general and administrative
   
66,864
     
49,315
 
Production start-up
   
1,143
     
6,209
 
Total operating expenses
   
90,895
     
67,228
 
Operating income
   
191,141
     
168,056
 
Foreign currency (loss) gain
   
(696
)
   
1,834
 
Interest income
   
5,648
     
2,103
 
Interest expense, net
   
     
(935
)
Other expense, net
   
(734
)
   
(1,326
)
Income before income taxes
   
195,359
     
169,732
 
Income tax expense
   
23,014
     
5,137
 
Net income
 
$
172,345
   
$
164,595
 
Net income per share:
               
Basic
 
$
2.04
   
$
2.01
 
Diluted
 
$
2.00
   
$
1.99
 
Weighted-average number of shares used in per share calculations:
               
Basic
   
84,505
     
81,685
 
Diluted
   
86,092
     
82,612
 

 
See accompanying notes to these condensed consolidated financial statements.
 
 
Page | 1
 
 
FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
   
March 27,
2010
   
December 26,
2009
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
 
$
420,886
   
$
664,499
 
Marketable securities 
   
293,288
     
120,236
 
Accounts receivable trade, net
   
269,222
     
226,826
 
Accounts receivable, unbilled
   
25,898
     
58
 
Inventories 
   
172,119
     
152,821
 
Project assets
   
109
     
1,081
 
Deferred tax asset, net 
   
22,487
     
21,679
 
Prepaid expenses and other current assets
   
200,524
     
164,071
 
Total current assets
   
1,404,533
     
1,351,271
 
Property, plant and equipment, net
   
1,030,219
     
988,782
 
Project assets 
   
131,919
     
131,415
 
Deferred tax asset, net 
   
150,031
     
130,515
 
Marketable securities 
   
305,802
     
329,608
 
Restricted cash and investments 
   
77,343
     
36,494
 
Investment in related party
   
25,000
     
25,000
 
Goodwill
   
286,515
     
286,515
 
Inventories 
   
26,945
     
21,695
 
Other assets 
   
35,207
     
48,217
 
Total assets
 
$
3,473,514
   
$
3,349,512
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Accounts payable
 
$
76,029
   
$
75,744
 
Income tax payable
   
15,729
     
8,740
 
Accrued expenses
   
141,470
     
186,682
 
Current portion of long-term debt
   
26,355
     
28,559
 
Other current liabilities 
   
62,891
     
95,202
 
Total current liabilities
   
322,474
     
394,927
 
Accrued solar module collection and recycling liability
   
97,836
     
92,799
 
Long-term debt
   
136,129
     
146,399
 
Other liabilities
   
70,220
     
62,600
 
Total liabilities
   
626,659
     
696,725
 
Stockholders’ equity:
               
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 85,279,882 and 85,208,199 shares issued and outstanding at March 27, 2010 and December 26, 2009, respectively
   
85
     
85
 
Additional paid-in capital
   
1,674,507
     
1,658,091
 
Contingent consideration
   
2,844
     
2,844
 
Accumulated earnings
   
1,173,708
     
1,001,363
 
Accumulated other comprehensive loss
   
(4,289
)
   
(9,596
)
Total stockholders’ equity
   
2,846,855
     
2,652,787
 
Total liabilities and stockholders’ equity
 
$
3,473,514
   
$
3,349,512
 
 
See accompanying notes to these condensed consolidated financial statements.
 
Page | 2
 
 
FIRST SOLAR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Three Months Ended
 
   
March 27,
2010
   
March 28,
2009
 
Cash flows from operating activities:
           
Cash received from customers
 
$
447,878
   
$
325,712
 
Cash paid to suppliers and associates
   
(404,696
)
   
(259,726
)
Interest received
   
9,359
     
2,885
 
Interest paid
   
(74
)
   
(2,208
)
Income taxes paid, net of refunds
   
  (18,892
   
658
 
Excess tax benefit from share-based compensation arrangements
   
(1,568
)
   
(3,254
)
Other operating activities
   
(734
)
   
(326
)
Net cash provided by operating activities
   
31,273
     
63,741
 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(105,976
)
   
(86,404
)
Purchases of marketable securities
   
(383,757
)
   
(117,554
)
Proceeds from maturities of marketable securities
   
33,756
     
7,000
 
Proceeds from sales of marketable securities
   
200,220
     
29,787
 
Investment in note receivable
   
     
(13,750
)
Payments received on notes receivable
   
35,817
     
 
Increase in restricted investments
   
(43,443
)
   
(313
)
Other investing activities
   
1,019
     
 
Net cash used in investing activities
   
(262,364
)
   
(181,234
)
Cash flows from financing activities:
               
Proceeds from stock option exercises
   
1,107
     
1,440
 
Repayment of long-term debt
   
(714
)
   
(3,858
)
Proceeds from issuance of debt, net of issuance costs
   
     
45,267
 
Excess tax benefit from share-based compensation arrangements
   
1,568
     
3,254
 
Proceeds from economic development funding
   
     
615
 
Other financing activities
   
     
(1
)
Net cash provided by financing activities
   
1,961
     
46,717
 
Effect of exchange rate changes on cash and cash equivalents
   
(14,483
)
   
(20,510
)
Net decrease in cash and cash equivalents
   
(243,613
)
   
(91,286
)
Cash and cash equivalents, beginning of the period
   
664,499
     
716,218
 
Cash and cash equivalents, end of the period
 
$
420,886
   
$
624,932
 
Supplemental disclosure of noncash investing and financing activities:
               
Property, plant and equipment acquisitions funded by liabilities
 
$
56,329
   
$
35,480
 

See accompanying notes to these condensed consolidated financial statements.
 
Page | 3
 
 
 
FIRST SOLAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three Months Ended March 27, 2010

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three months ended March 27, 2010 are not necessarily indicative of the results that may be expected for the year ending December 25, 2010, or for any other period. The balance sheet at December 26, 2009 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 26, 2009 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

We report our results of operations using a 52 or 53 week fiscal year, which ends on the Saturday on or before December 31. Our fiscal quarters end on the Saturday closest to the end of the applicable calendar quarter. Fiscal 2010 will end on December 25, 2010 and will consist of 52 weeks.

Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us” and “First Solar” refer to First Solar, Inc. and its subsidiaries.
 
 
Note 2. Summary of Significant Accounting Policies
 

These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and notes thereto for the year ended December 26, 2009 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. Our significant accounting policies reflect the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 605, Revenue Recognition – Multiple Deliverable Revenue Arrangements, in the first quarter of 2010.


Note 3. Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Codification Update (ASU) 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. ASU 2009-13 revises certain accounting for revenue arrangements with multiple deliverables. In particular when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, ASU 2009-13 allows use of a best estimate of the selling price to allocate the arrangement consideration among them. ASU 2009-13 is effective for the first quarter of 2011, with early adoption permitted. We elected to early adopt ASU 2009-13 at the beginning of the first quarter of fiscal 2010. The adoption of ASU 2009-13 did not have a material impact on our financial position, results of operations, or cash flows.

In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) - Certain Revenue Arrangements That Include Software Elements. This ASU changes the accounting model for revenue arrangements that involve a combination of tangible products and software. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue recognition guidance in ASC 985. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We elected to early adopt ASU 2009-14 at the beginning of the first quarter of fiscal 2010. The adoption of ASU 2009-14 did not have a material impact on our financial position, results of operations, or cash flows.

In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This ASU amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or other options. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009. The adoption of ASU 2009-15 did not have a material impact on our financial position, results of operations, or cash flows.
 
Page | 4
 
 
In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. This ASU amends the accounting for transfers of financials assets and requires disclosure of more information about transfers of financial assets, including securitizations, and about where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, with early adoption not permitted. The adoption of ASU 2009-16 did not have a material impact on our financial position, results of operations, or cash flows.

In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This ASU changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. The adoption of ASU 2009-17 did not have a material impact on our financial position, results of operations, or cash flows.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. This ASU requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. ASU 2010-06 requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers, and to present separately information about purchases, sales, issuances, and settlements for fair value measurements using significant unobservable inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010; early adoption is permitted. The adoption of ASU 2010-06 did not have a material impact on our financial position, results of operations, or cash flows.

In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. This ASU contains certain updates to standards for provisions that were outdated, contained inconsistencies, or needed clarification. The ASU contains various effective dates. The clarifications of the guidance on embedded derivatives and hedging (Subtopic 815-15) are effective for fiscal years beginning after December 15, 2009. The amendments to the guidance on accounting for income taxes in a reorganization (Subtopic 852-740) applies to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. All other amendments are effective as of the first reporting period (including interim periods) beginning after the date this ASU was issued. The adoption of ASU 2010-08 did not have a material impact on our financial position, results of operations, or cash flows.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements. This ASU removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. All the amendments in ASU 2010-09 were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of ASU 2010-09 did not have a material impact on our financial position, results of operations, or cash flows.

In February 2010, the FASB issued ASU 2010-10, Consolidation (Topic 810) – Amendments for Certain Investments Funds. This ASU amends certain provisions of ASC 810 pertaining to investments in variable interest entities to defer the effective date of ASU 2009-17 for certain investment entities and changes how decision makers and service providers determine whether their fees are variable interests. The amendments in ASU 2010-10 are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period. The adoption of ASU 2010-10 did not have a material impact on our financial position, results of operations, or cash flows.

In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging (Topic 815) – Scope Exception Related to Embedded Credit Derivatives. This ASU removes a scope exception, and an entity that has a beneficial interest in securitized financial assets that includes a credit derivative feature must evaluate that feature for bifurcation from the host financial asset in accordance with the guidance at ASC 815. ASU 2010-11 is effective at the beginning of a reporting entity’s first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of an entity’s first fiscal quarter beginning after March 5, 2010. We do not expect that the adoption of ASU 2010-11 will have a material impact on our financial position, results of operations, or cash flows.
 
Page | 5
 
 
Note 4. Acquisitions

OptiSolar

On April 3, 2009, we completed the acquisition of the solar power project development business (the Project Business) of OptiSolar Inc. (OptiSolar). Pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated March 2, 2009, by and among First Solar, Inc., First Solar Acquisition Corp. (Merger Sub), OptiSolar and OptiSolar Holdings LLC (OptiSolar Holdings), Merger Sub merged with and into OptiSolar, with OptiSolar surviving as a wholly-owned subsidiary of First Solar, Inc. (the Merger). Pursuant to the Merger, all the outstanding shares of common stock of OptiSolar held by OptiSolar Holdings were exchanged for 2,972,420 shares of First Solar common stock, par value $0.001 per share (the Merger Shares), of which 732,789 shares were issued and deposited with an escrow agent to support certain indemnification obligations of OptiSolar Holdings. Also, 355,096 shares were holdback shares as further described below under “Contingent Consideration” (the “Holdback Shares”). As of March 27, 2010, 2,951,256 Merger Shares had been issued. The period during which claims for indemnification from the escrow fund may be initiated began on April 3, 2009 and will end on April 3, 2011.

Purchase Price Consideration

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

Contingent Consideration

Pursuant to the Merger Agreement, of the 2,972,420 Merger Shares, as of April 3, 2009, 355,096 shares were Holdback Shares that were issuable to OptiSolar Holdings upon satisfaction of conditions relating to certain then-existing liabilities of OptiSolar. As of March 27, 2010, 333,932 Holdback Shares had been issued to OptiSolar Holdings. The estimated fair value of the 21,164 Holdback Shares remaining to be issued at March 27, 2010 was $2.8 million and has been classified separately within stockholders’ equity on our balance sheet. Subsequent to March 27, 2010, we issued 9,205 additional Holdback Shares to OptiSolar Holdings.

         Goodwill

We recorded the excess of the acquisition date fair value of consideration transferred over the estimated fair value of the net tangible assets and intangible assets acquired as goodwill. Subsequent to the acquisition of OptiSolar, we adjusted goodwill downward during 2009 by $8.5 million as additional information relating to acquired deferred tax assets became available. We have allocated $251.3 million and $1.4 million of this goodwill to our components reporting segment and our systems segment (reported under “Other” in our disclosure of segment operating results at Note 20. “Segment Reporting”), respectively. This goodwill is not deductible for tax purposes.

Acquired project assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the acquired project development business. In our determination of the fair value of the project assets acquired, we considered among other factors, three generally accepted valuation approaches: the income approach, market approach, and cost approach. We selected the approaches that are most indicative of fair value of the assets acquired. We used the income approach to calculate the fair value of the acquired project assets based on estimates and assumptions of future performance of these project assets provided by OptiSolar’s and our management. We used the market approach to determine the fair value of the land acquired with those assets.
 
Page | 6
 
 
Note 5. Goodwill and Intangible Assets

Goodwill

On November 30, 2007, we acquired 100% of the outstanding membership interests of Turner Renewable Energy, LLC. Under the purchase method of accounting, we allocated $33.4 million to goodwill through December 29, 2007, which represents the excess of the purchase price over the fair value of the identifiable net tangible and intangible assets of Turner Renewable Energy, LLC. All of this goodwill was allocated to our systems segment (reported under “Other” in our disclosure of segment operating results at Note 20. “Segment Reporting”). At March 27, 2010 and December 26, 2009, the carrying amount of this goodwill was $33.8 million.
 
On April 3, 2009, we acquired the solar power project development business of OptiSolar. Under the acquisition method of accounting, we allocated $261.1 million to goodwill (excluding subsequent adjustments of $8.5 million), which primarily represents the synergies and economies of scale expected from acquiring OptiSolar’s project pipeline and using our solar modules in the acquired projects.

During 2009, we adjusted goodwill downward by $8.5 million as additional information relating to acquired deferred tax assets became available. We have allocated $251.3 million and $1.4 million of this goodwill to our components reporting segment and systems segment (reported under “Other” in our disclosure of segment operating results at Note 20. “Segment Reporting”), respectively. At March 27, 2010 and December 26, 2009, the carrying amount of this goodwill was $252.7 million. See Note 4. “Acquisitions,” to our condensed consolidated financial statements for additional information about this acquisition.

The changes in the carrying amount of goodwill for the three months ended March 27, 2010 were as follows (in thousands):

   
Components
   
Systems
   
Consolidated
 
Ending balance, December 26, 2009
 
$
251,275
   
$
35,240
   
$
286,515
 
Adjustments
   
     
     
 
Ending balance, March 27, 2010
 
$
251,275
   
$
35,240
   
$
286,515
 

ASC 350, Intangibles – Goodwill and Other, requires us to test goodwill for impairment at least annually, or sooner, if facts or circumstances between scheduled annual tests indicate that it is more likely than not that the fair value of a reporting unit that has goodwill might be less than its carrying value. We performed our goodwill impairment test in the fourth fiscal quarter of the year ended December 26, 2009 and determined that the fair value of our goodwill substantially exceeded the carrying value. Therefore we concluded that our goodwill was not impaired. We have also concluded that there have been no changes in facts and circumstances since the date of that test that would trigger an interim goodwill impairment test.
 
Project Assets

In connection with the acquisition of the solar power project development business of OptiSolar, we measured at fair value certain acquired project assets based on the varying development stages of each project asset on the acquisition date. Once we enter into a definitive sales agreement, we reclassify these costs to deferred project costs on our balance sheet. We expense these project assets to cost of sales as each respective project asset or solar power system is sold to a customer, constructed for a customer (matching the underlying revenue recognition method), or if we determine that the project is commercially not viable. See also Note 8. “Consolidated Balance Sheet Details,” to our condensed consolidated financial statements about balances for project assets.
 
Page | 7
 
 
Note 6. Cash and Investments

Cash, cash equivalents, and marketable securities consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Cash and cash equivalents:
           
   Cash
 
$
247,364
   
$
269,068
 
Cash equivalents:
               
   Money market mutual fund
   
173,522
     
395,431
 
     Total cash and cash equivalents
   
420,886
     
664,499
 
Marketable securities:
               
   Asset-backed securities
   
3,278
     
5,544
 
   Certificates of deposit
   
10,704
     
 
   Commercial paper
   
9,088
     
 
   Corporate debt securities
   
192,428
     
115,248
 
   Federal agency debt
   
73,166
     
78,911
 
   Foreign agency debt
   
224,410
     
168,963
 
   Foreign government obligations
   
14,728
     
10,128
 
   Supranational debt
   
67,272
     
71,050
 
   U.S. government obligations
   
4,016
     
 
    Total marketable securities
   
599,090
     
449,844
 
  Total cash, cash equivalents, and marketable securities
 
$
1,019,976
   
$
1,114,343
 

We have classified our marketable securities as “available-for-sale.” Accordingly, we record them at fair value and account for net unrealized gains and losses as part of accumulated other comprehensive income. We report realized gains and losses on the sale of our marketable securities in earnings, computed using the specific identification method. During the three months ended March 27, 2010, we realized $0.3 million in gains and $0.1 million in losses on our marketable securities. During the three months ended March 28, 2009, we realized an immaterial amount in gains and did not realize any losses on our marketable securities. See Note 10. “Fair Value Measurement,” to our condensed consolidated financial statements for information about the fair value measurement of our marketable securities.

All of our available-for-sale marketable securities are subject to a periodic impairment review. We consider a marketable debt security to be impaired when its fair value is less than its carrying cost, in which case we would further review the investment to determine whether it is other-than-temporarily impaired. When we evaluate an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, our intent to sell, and whether it is more likely than not we will be required to sell the investment before we have recovered its cost basis. If an investment is other-than-temporarily impaired, we write it down through earnings to its impaired value and establish that as a new cost basis for the investment. We did not identify any of our marketable securities as other-than-temporarily impaired at March 27, 2010 and December 26, 2009.
 
Page | 8
 
 
The following table summarizes the unrealized gains and losses related to our investments in marketable securities designated as available-for-sale, by major security type as of March 27, 2010 and December 26, 2009 (in thousands):

   
As of March 27, 2010
 
 
 
Security Type
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Asset-backed securities
 
$
3,261
   
$
21
   
$
4
   
$
3,278
 
Certificates of deposit
   
10,704
     
     
     
10,704
 
Commercial paper
   
9,088
     
     
     
9,088
 
Corporate debt securities
   
191,592
     
969
     
133
     
192,428
 
Federal agency debt
   
73,117
     
57
     
8
     
73,166
 
Foreign agency debt
   
223,637
     
829
     
56
     
224,410
 
Foreign government obligations
   
14,638
     
90
     
     
14,728
 
Supranational debt
   
66,587
     
685
     
     
67,272
 
U.S. government obligations
   
4,020
     
     
4
     
4,016
 
Total
 
$
596,644
   
$
2,651
   
$
205
   
$
599,090
 

   
As of December 26, 2009
 
 
 
Security Type
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Asset-backed securities
 
$
5,528
   
$
19
   
$
3
   
$
5,544
 
Corporate debt securities
   
114,912
     
475
     
139
     
115,248
 
Federal agency debt
   
78,803
     
108
     
     
78,911
 
Foreign agency debt
   
168,541
     
588
     
166
     
168,963
 
Foreign government obligations
   
10,057
     
71
     
     
10,128
 
Supranational debt
   
70,807
     
269
     
26
     
71,050
 
Total
 
$
448,648
   
$
1,530
   
$
334
   
$
449,844
 

Contractual maturities of our available-for-sale marketable securities as of March 27, 2010 and December 26, 2009 were as follows (in thousands):

   
As of March 27, 2010
 
 
 
Maturity
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
One year or less
 
$
292,410
   
$
946
   
$
68
   
$
293,288
 
One year to two years
   
263,044
     
1,382
     
137
     
264,289
 
Two years to three years
   
41,190
     
323
     
     
41,513
 
Total
 
$
596,644
   
$
2,651
   
$
205
   
$
599,090
 
 
 
Page | 9
 
 
   
As of December 26, 2009
 
 
 
Maturity
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
One year or less
 
$
119,911
   
$
327
   
$
2
   
$
120,236
 
One year to two years
   
269,488
     
963
     
185
     
270,266
 
Two years to three years
   
59,249
     
240
     
147
     
59,342
 
Total
 
$
448,648
   
$
1,530
   
$
334
   
$
449,844
 

The net unrealized gain of $2.4 million and $1.2 million as of March 27, 2010 and December 26, 2009, respectively, on our available-for-sale marketable securities was primarily the result of changes in interest rates. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single A or better and limits the security types, issuer concentration, and duration of the investments.

The following table shows gross unrealized losses and estimated fair values for those investments that were in an unrealized loss position as of March 27, 2010 and December 26, 2009, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

   
As of March 27, 2010
 
   
In Loss Position for
Less Than 12 Months
   
In Loss Position for
12 Months or Greater
   
Total
 
 
 
Security Type
 
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
 
Asset-backed securities
 
$
1,466
   
$
4
   
$
   
$
   
$
1,466
   
$
4
 
Corporate debt securities
   
72,024
     
133
     
     
     
72,024
     
133
 
Federal agency debt
   
15,289
     
8
     
     
     
15,289
     
8
 
Foreign agency debt
   
61,582
     
56
     
     
     
61,582
     
56
 
U.S. government obligations
   
4,016
     
4
     
     
     
4,016
     
4
 
Total
 
$
154,377
   
$
205
   
$
   
$
   
$
154,377
   
$
205
 

   
As of December 26, 2009
 
   
In Loss Position for
Less Than 12 Months
   
In Loss Position for
12 Months or Greater
   
Total
 
 
 
Security Type
 
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
 
Asset-backed securities
 
$
2,868
   
$
3
   
$
   
$
   
$
2,868
   
$
3
 
Corporate debt securities
   
32,303
     
139
     
     
     
32,303
     
139
 
Foreign agency debt
   
45,329
     
166
     
     
     
45,329
     
166
 
Supranational debt
   
7,201
     
26
     
     
     
7,201
     
26
 
Total
 
$
87,701
   
$
334
   
$
   
$
   
$
87,701
   
$
334
 
 
Page | 10
 
 
Note 7. Restricted Cash and Investments

Restricted cash and investments consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Restricted cash
 
$
21
   
$
27
 
Restricted investments
   
77,322
     
36,467
 
Total restricted cash and investments — noncurrent
 
$
77,343
   
$
36,494
 

At March 27, 2010 and December 26, 2009, our restricted investments consisted of long-term marketable securities that we hold through a custodial account to fund future costs of our solar module collection and recycling program.

We pre-fund our estimated solar module collection and recycling costs at the time of module sale through a custodial account with a large bank as the investment advisor in the name of a trust, for which First Solar Inc., First Solar Malaysia Sdn. Bhd., and First Solar Manufacturing GmbH are grantors. We fund this custodial account within 60 days of the beginning of a fiscal year for the prior year module sales, assuming for this purpose a minimum service life of 25 years for our solar modules.

The following table summarizes unrealized gains and losses related to our restricted investments in marketable securities designated as available-for-sale by major security type as of March 27, 2010 and December 26, 2009 (in thousands):

   
As of March 27, 2010
 
 
 
Security Type
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Foreign government obligations
 
$
71,060
   
$
2,092
   
$
940
   
$
72,212
 
U.S. government obligations
   
5,312
     
     
202
     
5,110
 
Total
 
$
76,372
   
$
2,092
   
$
1,142
   
$
77,322
 

   
As of December 26, 2009
 
 
 
Security Type
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Foreign government obligations
 
$
34,403
   
$
1,308
   
$
   
$
35,711
 
U.S. government obligations
   
783
     
     
27
     
756
 
Total
 
$
35,186
   
$
1,308
   
$
27
   
$
36,467
 
 
         As of March 27, 2010 and December 26, 2009, the contractual maturities of these available-for-sale marketable securities were between 18 and 26 years.


 
Page | 11
 
 
Note 8. Consolidated Balance Sheet Details

Accounts receivable trade, net

Accounts receivable trade consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Accounts receivable trade, gross
 
$
269,222
   
$
227,816
 
Allowance for doubtful account
   
     
(990
)
Accounts receivable trade, net
 
$
269,222
   
$
226,826
 

The increase in accounts receivable trade during the three months ended March 27, 2010 was mainly due to higher shipment volumes and the timing of shipments to customers during the quarter.

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

We account for these rebates as a reduction to the selling price of our solar modules and, therefore, as a reduction in revenue at the time of sale. No rebates granted under this program can be claimed as cash; instead, rebates may only be applied to reduce outstanding accounts receivable balances. During the three months ended March 27, 2010, we extended rebates to customers in the amount of €20.0 million ($27.8 million at the average exchange rate of $1.39/€1.00). At March 27, 2010, we had €31.8 million ($42.6 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00) of rebate claims accrued, which reduced our accounts receivable accordingly.
 
In June 2009, we provided an allowance for doubtful accounts receivable in the amount of $7.0 million due to uncertainty about the collectability of the outstanding accounts receivable from a specific customer. As of December 26, 2009, we had collected $6.0 million of the overdue accounts receivable from this specific customer and reduced our allowance for the doubtful account accordingly. During the three months ended March 27, 2010, we collected the remaining $1.0 million.

Accounts receivable, unbilled

We recognize revenue from long-term contracts for the construction and sale of project assets and solar power systems over the contractual period under applicable accounting methods. Under the percentage-of-completion method of accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. We recognize revenues that will not be billed under the terms of the contracts until a later date in “accounts receivable, unbilled.” Once we meet the billing criteria under a contract, we bill our customer accordingly and reclassify the “accounts receivable, unbilled” to “accounts receivable trade, net.” Accounts receivable, unbilled were $25.9 million and $0.1 million at March 27, 2010 and December 26, 2009, respectively.

Inventories

Inventories consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Raw materials
 
$
128,395
   
$
122,282
 
Work in process
   
5,282
     
6,248
 
Finished goods
   
65,387
     
45,986
 
Total inventories
 
$
199,064
   
$
174,516
 
Inventory — current
 
$
172,119
   
$
152,821
 
Inventory — noncurrent (1)
 
$
26,945
   
$
21,695
 

(1)  
Raw materials not used within our normal operating cycle are classified as inventory -noncurrent.

 
Page | 12
 
 
Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Prepaid expenses
 
$
31,852
   
$
33,095
 
Deferred project costs
   
66,320
     
36,670
 
Notes receivable (See Note 12. “Notes Receivable”)
   
25,695
     
50,531
 
Derivative instruments 
   
24,552
     
7,909
 
Other current assets
   
52,105
     
35,866
 
Total prepaid expenses and other current assets
 
$
200,524
   
$
164,071
 

Project Assets – Current and Noncurrent

Project assets – current and noncurrent consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Project assets acquired through OptiSolar
 
$
71,037
   
$
71,037
 
Project assets — land
   
16,524
     
1,452
 
Project assets — other
   
44,467
     
60,007
 
Total project assets
 
$
132,028
   
$
132,496
 
Total project assets — current
 
$
109
   
$
1,081
 
Total project assets — noncurrent
 
$
131,919
   
$
131,415
 

Project assets consist primarily of costs relating to solar power projects in various stages of development that we capitalize prior to the sale of the solar power project to a third party for further project development or signing of a project construction contract. These costs include costs for land and costs for developing and constructing a solar power plant. Development costs can include legal, consulting, permitting costs, as well as other development costs. Once we enter into a definitive sales agreement, we reclassify these costs to deferred project costs on our balance sheet until we are able to recognize the sale of the project assets as revenue. Project assets acquired in connection with the acquisition of OptiSolar were measured at fair value on the acquisition date. Subsequent to the acquisition of OptiSolar, we incurred additional costs to further develop these projects.

We expense project assets/deferred project costs to cost of sales as each respective project asset or solar power system is sold to a customer, constructed for a customer (matching the underlying revenue recognition method), or if we determine that the project is commercially not viable. See also Note 5. “Goodwill and Intangible Assets,” to our condensed consolidated financial statements for further information.

 
Page | 13
 
 
Property, plant and equipment, net

Property, plant and equipment, net consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Buildings and improvements
 
$
239,142
   
$
239,088
 
Machinery and equipment
   
800,873
     
813,281
 
Office equipment and furniture
   
41,307
     
38,845
 
Leasehold improvements
   
19,173
     
15,870
 
Depreciable property, plant and equipment, gross
   
1,100,495
     
1,107,084
 
Accumulated depreciation
   
(254,716
)
   
(225,790
)
Depreciable property, plant and equipment, net
   
845,779
     
881,294
 
Land
   
4,856
     
4,995
 
Construction in progress
   
179,584
     
102,493
 
Property, plant and equipment, net
 
$
1,030,219
   
$
988,782
 

During the three months ended March 27, 2010 we were granted a $16.3 million tax credit under the Advanced Energy Tax Credit program enacted by the American Reinvestment and Recovery Act of 2009 in relation to the expansion of our Perrysburg, Ohio manufacturing facility. As a result, we reduced the acquisition cost for the expansion of this facility accordingly. Depreciation of property, plant, and equipment was $36.6 million and $25.8 million for the three months ended March 27, 2010 and March 28, 2009, respectively.

Capitalized Interest

         We capitalized interest costs incurred into our property, plant, and equipment or our project assets/deferred project costs as follows during the three months ended March 27, 2010 and March 28, 2009 (in thousands):

   
Three Months Ended
 
   
March 27,
2010
   
March 28,
2009
 
Interest cost incurred
 
$
2,275
   
$
2,414
 
Interest cost capitalized – property, plant, and equipment
   
(418
)
   
(1,479
)
Interest cost capitalized – project assets and deferred project costs
   
(1,857
)
   
 
Interest expense, net
 
$
   
$
935
 

Accrued expenses

Accrued expenses consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Accrued compensation and benefits
 
$
22,504
   
$
53,856
 
Accrued property, plant, and equipment
   
31,318
     
35,811
 
Accrued inventory
   
18,703
     
27,542
 
Product warranty liability - current
   
8,461
     
8,216
 
Other accrued expenses
   
60,484
     
61,257
 
Total accrued expenses
 
$
141,470
   
$
186,682
 
 
 
Page | 14
 
 
Other current liabilities

Other current liabilities consisted of the following at March 27, 2010 and December 26, 2009 (in thousands):

   
March 27,
2010
   
December 26,
2009
 
Deferred revenue (1)
 
$
17,344
   
$
31,127
 
Derivative instruments 
   
5,194
     
30,781
 
Other current liabilities
   
40,353
     
33,294
 
Total other current liabilities
 
$
62,891
   
$
95,202
 

(1)  
Deferred revenue will be recognized once all revenue recognition criteria have been met.


Note 9. Derivative Financial Instruments

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

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

The following table presents the fair values of derivative instruments included in our consolidated balance sheet as of March 27, 2010 and December 26, 2009 (in thousands):

   
March 27, 2010
 
   
Other Assets -
Current
   
Other Assets -
Noncurrent
   
Other Liabilities -
Current
   
Other Liabilities - Noncurrent
 
Derivatives designated as hedging instruments under ASC 815:
                   
Foreign exchange forward contracts
 
$
21,127
   
$
794
   
$
964
   
$
 
Interest rate swap contracts
   
     
     
252
     
1,286
 
Total derivatives designated as hedging instruments
   
21,127
     
794
     
1,216
     
1,286
 
                                 
Derivatives not designated as hedging instruments under ASC 815:
                         
Foreign exchange forward contracts
   
3,425
     
     
3,978
     
 
Total derivatives not designated as hedging instruments
   
3,425
     
     
3,978
     
 
                                 
Total derivative instruments
 
$
24,552
   
$
794
   
$
5,194
   
$
1,286
 

 
Page | 15
 
 
   
December 26, 2009
 
   
Other Assets -
Current
   
Other Assets -
Noncurrent
   
Other Liabilities -
Current
   
Other Liabilities - Noncurrent
 
Derivatives designated as hedging instruments under ASC 815:
                   
Foreign exchange forward contracts
 
$
3,781
   
$
   
$
19,723
   
$
 
Interest rate swap contracts
   
     
     
178
     
905
 
Total derivatives designated as hedging instruments
   
3,781
     
     
19,901
     
905
 
                                 
Derivatives not designated as hedging instruments under ASC 815:
                         
Foreign exchange forward contracts
   
4,128
     
     
10,880
     
 
Total derivatives not designated as hedging instruments
   
4,128
     
     
10,880
     
 
                                 
Total derivative instruments
 
$
7,909
   
$
   
$
30,781
   
$
905
 

The following tables present the amounts related to derivative instruments affecting our consolidated statement of operations for the three months ended March 27, 2010 and March 28, 2009 (in thousands):

   
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives
     
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Derivative Type
 
Three Months Ended
March 27, 2010
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Three Months Ended
March 27, 2010
 
Derivatives designated as cash flow hedges under ASC 815:
             
Foreign exchange forward contracts
 
$
36,899
 
Net sales
 
$
1,295
 
Interest rate swaps
   
(455
)
Interest income (expense)
   
(319
)
Total derivatives designated as cash flow hedges
 
$
36,444
     
$
976
 

   
Amount of Gain (Loss) on Derivatives Recognized in Income
   
Derivative Type
 
Three Months Ended
March 27, 2010
 
Location of Gain (Loss) Recognized in Income on Derivatives
Derivatives designated as cash flow hedges under ASC 815:
       
Foreign exchange forward contracts
 
$
1,295
 
Net sales
Interest rate swaps
 
$
(319
)
Interest income (expense)
           
Derivatives not designated as hedging instruments under ASC 815:
         
Foreign exchange forward contracts
 
$
(5,563
)
Other income (expense)
Foreign exchange forward contracts
 
$
(4,514
)
Cost of sales
Foreign exchange forward contracts
 
$
(340
)
Revenue

 
 
Page | 16
 
 
   
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives
     
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Derivative Type
 
Three Months Ended
March 28, 2009
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Three Months Ended
March 28, 2009
 
Derivatives designated as cash flow hedges under ASC 815:
             
Foreign exchange forward contracts
 
$
23,876
 
Net sales
 
$
22,190
 
Interest rate swaps
   
 (777
)
 Interest income (expense)
   
(134
Total derivatives designated as cash flow hedges
 
$
23,099
     
$
22,056
 

   
Amount of Gain (Loss) on Derivatives recognized in Income
   
Derivative Type
 
Three Months Ended
March 28, 2009
 
Location of Gain (Loss) Recognized in Income on Derivatives
Derivatives designated as cash flow hedges under ASC 815:
   
Foreign exchange forward contracts
 
$
22,190
 
Net sales
Interest rate swaps
 
$
(134
)
Interest income (expense)
           
Derivatives not designated as hedging instruments under ASC 815:
   
Foreign exchange forward contracts
 
$
(4,889
)
Other income (expense)
Foreign exchange forward contracts
 
$
(1,455
)
Cost of sales
           
  Credit default swaps
 
$
(1,000
)
Other income (expense)

Interest Rate Risk

We use interest rate swap agreements to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use such swap agreements for speculative or trading purposes. On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our Malaysian credit facility, which became effective on September 30, 2009 with a notional value of €57.3 million ($76.8 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00) and pursuant to which we are entitled to receive a six-month floating interest rate, the Euro Interbank Offered Rate (Euribor), and required to pay a fixed rate of 2.80%. The notional amount of the interest rate swap contract is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. This derivative instrument qualifies for accounting as a cash flow hedge in accordance with FASB ASC 815 and we designated it as such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at March 27, 2010.
 
Foreign Currency Exchange Risk

Cash Flow Exposure

We expect many of the components of our business to have material future cash flows, including revenues and expenses that will be denominated in currencies other than the component’s functional currency. Our primary cash flow exposures are customer collections and vendor payments. Changes in the exchange rates between our components’ functional currencies and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge the value of a portion of these forecasted cash flows. As of March 27, 2010, these foreign exchange contracts hedge our forecasted future cash flows for up to 18 months. These foreign exchange contracts qualified for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of the derivative’s gain or loss in “Accumulated other comprehensive income (loss)” and subsequently reclassify amounts into earnings when the hedged transaction is settled. We determined that these derivative financial instruments were highly effective as cash flow hedges at March 27, 2010. In addition, during the three months ended March 27, 2010, we did not discontinue any cash flow hedges because it was probable that a forecasted transaction would not occur.
 
Page | 17
 
 
During the three months ended March 27, 2010, we purchased foreign exchange forward contracts to hedge the exchange risk on forecasted cash flows denominated in euro. As of March 27, 2010, the unrealized gain on these contracts was $21.0 million and the total notional value of the contracts was €315.0 million ($422.1 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00). The weighted average forward exchange rate for these contracts was $1.40/€1.00 at March 27, 2010.

In the following 12 months, we expect to reclassify to earnings $20.2 million of net unrealized gains related to these forward contracts that are included in accumulated other comprehensive loss at March 27, 2010 as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rate when we realize the related forecasted transaction. During the three months ended March 27, 2010, we realized a gain of $1.0 million related to our cash flow hedges.

Transaction Exposure

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

During the three months ended March 27, 2010, we purchased foreign exchange forward contracts to hedge balance sheet exposures related to transactions with third parties. We recognize gains or losses from the fluctuation in foreign exchange rates and the valuation of these derivative contracts in cost of sales and foreign currency gain (loss) on our consolidated statements of operations, depending on where the gain or loss from the hedged item is classified on our consolidated statement of operations. As of March 27, 2010, the total unrealized loss on our foreign exchange forward contracts was $0.6 million. These contracts have maturities of less than two months.

As of March 27, 2010, the total notional value of our foreign exchange forward contracts was as follows (notional amounts and U.S. dollar equivalents in millions):

Transaction
 
Currency
 
Notional Amount
 
U.S. Equivalent
 
Balance sheet close rate on
March 27, 2010
Purchase
 
Euro
 
€208.0
 
$278.7
 
$1.34/€1.00
Sell
 
Euro
 
€137.5
 
$184.3
 
$1.34/€1.00
Purchase
 
Malaysian ringgits
 
MYR 120.3
 
$36.1
 
$0.30/MYR1.00
Sell
 
Malaysian ringgits
 
MYR 44.0
 
$13.2
 
$0.30/MYR1.00
Purchase
 
Japanese yen
 
JPY 716.0
 
$7.2
 
$0.01/JPY1.00
Sell
 
Japanese yen
 
JPY 576.0
 
$5.8
 
$0.01/JPY1.00
Purchase
 
Canadian dollar
 
CAD 16.5
 
$16.0
 
$0.97/CAD1.00
Sell
 
Canadian dollar
 
CAD 19.0
 
$18.4
 
$0.97/CAD1.00
 
Credit Risk

We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash, cash equivalents, investments, trade accounts receivable, interest rate swap contracts, and foreign exchange forward contracts. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. We place cash, cash equivalents, investments, interest rate swap contracts, and foreign exchange forward contracts with various high-quality financial institutions and limit the amount of credit risk from any one counterparty. We continuously evaluate the credit standing of our counterparty financial institutions.
 
Page | 18
 
 
Note 10. Fair Value Measurement

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

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

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

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

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

 
Cash equivalents. At March 27, 2010, our cash equivalents consisted of money market mutual funds. We value our cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, we classify the valuation techniques that use these inputs as Level 1.

 
Marketable securities. At March 27, 2010, our marketable securities consisted of asset-backed securities, certificates of deposit, commercial paper, corporate debt securities, federal and foreign agency debt, U.S. and foreign government obligations, and supranational debt. We value our marketable securities using quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2. We also consider the effect of our counterparties’ credit standings in these fair value measurements.

 
Derivative assets and liabilities. At March 27, 2010, our derivative assets and liabilities consisted of foreign exchange forward contracts involving major currencies and interest rate swap contracts involving benchmark interest rates. Since our derivative assets and liabilities are not traded on an exchange, we value them using valuation models. Interest rate yield curves and foreign exchange rates are the significant inputs into these valuation models. These inputs are observable in active markets over the terms of the instruments we hold, and accordingly, we classify these valuation techniques as Level 2. We consider the effect of our own credit standing and that of our counterparties in our valuations of our derivative assets and liabilities.

 
Solar module collection and recycling liability. We account for our obligation to collect and recycle the solar modules that we sell in a similar manner to the accounting for asset retirement obligations that is prescribed by ASC 410, Asset Retirement and Environmental Obligations. When we sell solar modules, we initially record our liability for collecting and recycling those particular solar modules at the fair value of this liability, and then in subsequent periods, we accrete this fair value to the estimated future cost of collecting and recycling the solar modules. Therefore, this is a one-time nonrecurring fair value measurement of the collection and recycling liability associated with each particular solar module sold.
 
 
Since there is not an established market for collecting and recycling our solar modules, we value our liability using a valuation model (an income approach). This fair value measurement requires us to use significant unobservable inputs, which are primarily estimates of collection and recycling process costs and estimates of future changes in costs due to inflation and future currency exchange rates. Accordingly, we classify these valuation techniques as Level 3. We estimate collection and recycling process costs based on analyses of the collection and recycling technologies that we are currently developing; we estimate future inflation costs based on analysis of historical trends; and we estimate future currency exchange rates based on current rate information. We consider the effect of our own credit standing in our measurement of the fair value of this liability.
 
 
Page | 19
 
 
At March 27, 2010 and December 26, 2009, information about inputs into the fair value measurements of our assets and liabilities that we make on a recurring basis was as follows (in thousands):

   
As of March 27, 2010
 
         
Fair Value Measurements at Reporting
Date Using
 
   
Total Fair
Value and
Carrying
Value on Our
Balance Sheet
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Cash equivalents:
                       
Money market mutual funds
 
$
173,522
   
$
173,522
   
$
   
$
 
Marketable securities:
                               
Asset backed securities
   
3,278
     
     
3,278
     
 
Certificates of deposit
   
10,704
     
     
10,704
     
 
Commercial paper
   
9,088
     
     
9,088
     
 
Corporate debt securities
   
192,428
     
     
192,428
     
 
Federal agency debt
   
73,166
     
     
73,166
     
 
Foreign agency debt
   
224,410
     
     
224,410
     
 
Foreign government obligations
   
14,728
     
     
14,728
     
 
Supranational debt
   
67,272
     
     
67,272
     
 
U.S. government obligations
   
4,016
     
     
4,016
     
 
Derivative assets
   
25,346
     
     
25,346
     
 
Total assets
 
$
797,958
   
$
173,522
   
$
624,436
   
$
 
Liabilities:
                               
Derivative liabilities
 
$
6,480
   
$
   
$
6,480
   
$
 

   
As of December 26, 2009
 
         
Fair Value Measurements at Reporting
Date Using
 
   
Total Fair
Value and
Carrying
Value on Our
Balance Sheet
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Cash equivalents:
                       
Money market mutual funds
 
$
395,431
   
$
395,431
   
$
   
$
 
Marketable securities:
                               
Asset backed securities
   
5,544
     
     
5,544
     
 
Corporate debt securities
   
115,248
     
     
115,248
     
 
Federal agency debt
   
78,911
     
     
78,911
     
 
Foreign agency debt
   
168,963
     
     
168,963
     
 
Foreign government obligations
   
10,128
     
     
10,128
     
 
Supranational debt
   
71,050
     
     
71,050
     
 
Derivative assets
   
7,909
     
     
7,909
     
 
Total assets
 
$
853,184
   
$
395,431
   
$
457,753
   
$
 
Liabilities:
                               
Derivative liabilities
 
$
31,686
   
$
   
$
31,686
   
$
 

 
Page | 20
 
 
 Fair Value of Financial Instruments

The carrying values and fair values of our financial instruments at March 27, 2010 and December 26, 2009 were as follows (in thousands):

   
March 27, 2010
   
December 26, 2009
 
   
Carrying
Value
   
Fair
Value
   
Carrying
Value
   
Fair
Value
 
Assets:
                       
Marketable securities, current and noncurrent
 
$
599,090
   
$
599,090
   
$
449,844
   
$
449,844
 
Notes receivable — current
 
$
25,695
   
$
25,695
   
$
50,531
   
$
50,531
 
Foreign exchange forward contract assets
 
$
25,346
   
$
25,346
   
$
7,909
   
$
7,909
 
Restricted  investments (excluding restricted cash)
 
$
77,322
   
$
77,322
   
$
36,467
   
$
36,467
 
Investment in related party
 
$
25,000
   
$
20,210
   
$
25,000
   
$
25,000
 
Notes receivable — noncurrent
 
$
9,364
   
$
9,401
   
$
25,241
   
$
25,332
 
Liabilities:
                               
Long-term debt, including current maturities
 
$
162,484
   
$
168,530
   
$
174,958
   
$
178,900
 
Interest rate swaps
 
$
1,538
   
$
1,538
   
$
1,083
   
$
1,083
 
Foreign exchange forward contract liabilities
 
$
4,942
   
$
4,942
   
$
30,603
   
$
30,603
 

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

We performed an interim assessment of our investment in a related party at March 27, 2010. Based on the assessment, evidence suggested that the fair value of the investment was below its cost at March 27, 2010. We then evaluated the investment for other-than-temporary impairment and based on the most recent financial information and projections available, we concluded that the investment was not other-than-temporarily impaired at March 27, 2010.

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


Note 11. Related Party Transactions

During 2008, we entered into a long-term solar module supply agreement with a company based in the United States that supplies and installs solar power systems to commercial and residential customers and that also qualifies as a related party. During the three months ended March 27, 2010, we recognized $9.6 million in net sales to this related party. At March 27, 2010, we had accounts receivable from this related party of $6.7 million.

Note 12. Notes Receivable

On April 8, 2009 we entered into a credit facility agreement with a solar project entity of one of our customers for an available amount of €17.5 million ($23.5 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00) to provide financing for a photovoltaic power generation facility. The credit facility replaced a bridge loan that we had made to this entity. The credit facility bears interest at 8% per annum and is due on December 31, 2026. As of March 27, 2010 and December 26, 2009, the balance on this credit facility was €7.0 million and €17.5 million, respectively ($9.4 million and $23.5 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00). The outstanding amount of this credit facility is included within “Other assets – noncurrent” on our consolidated balance sheets.
 
 
Page | 21
 
 
On April 21, 2009, we entered into a revolving VAT financing facility agreement for an available amount of €9.0 million ($12.1 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00) with the same solar project entity with which we entered into the credit facility agreement on April 8, 2009. The VAT facility agreement pre-finances the amounts of German value added tax (VAT) and any other tax obligations of similar nature during the construction phase of the photovoltaic power generation facility. Borrowings under this facility are short-term in nature, since the facility is repaid when VAT amounts are reimbursed by the government. The VAT facility agreement bears interest at the rate of Euribor plus 1.2% and matures on December 31, 2010. As of March 27, 2010, the facility was fully repaid and there was no balance outstanding. As of December 26, 2009, the balance on this financing agreement was €1.4 million ($1.9 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00). The outstanding amount of this financing agreement was included within “Prepaid expenses and other current assets” on our consolidated balance sheets during the year ended December 26, 2009.

In October 2009, we entered into a fixed rate note with a solar power project entity to finance construction and start-up costs of a photovoltaic facility in Germany. This note provides funding in the amount of €19.2 million ($25.7 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00). The fixed rate note is due on May 31, 2010 and bears interest at 7% per annum. The fixed rate note is collateralized by a bank account pledge agreement, a security assignment agreement, a partnership interest pledge agreement, and a share pledge agreement. €19.2 million ($25.7 million at the balance sheet close rate on March 27, 2010 of $1.34/€1.00) was outstanding as of March 27, 2010 and December 26, 2009. The outstanding amount of this fixed rate note is included within “Prepaid expenses and other current assets” on our consolidated balance sheets. Subsequent to March 27, 2010, we received the full repayment of this fixed rate note, including interest.